Avellemy weekly Market update Issue 2 – Steven Lloyd, Investment Director

Welcome to our latest weekly roundup of market news.

Our aim is to keep our clients and investors informed of the latest developments in global financial markets and any potential impact on portfolios they hold.

The first part of this week has seen a markedly more upbeat tone in markets with a distinct glimmer of hope that the worst may now be over given improving data from Italy, Spain and New York. This has seen risk assets rally sharply although equities have struggled to hang on to their gains more recently.

There is much debate amongst market participants, economists and portfolio managers as to whether the recent market strength is the beginning of a new sustained upturn or a bear market rally. Only time will tell.

As my colleagues have rightly pointed out, attempting to “call” the bottom in markets is folly and we are resisting any temptation to try and do so. Some have looked back to the financial crisis of 2008 to try and draw comparisons but there are flaws in doing so. Primarily, no investor alive today has experienced a market like this. 2008 was a debt crisis whereas the experience today is of a self-inflicted recession which is likely to be severe. To be clear, the coronavirus has not caused the recession, the measures put in place to curb the spread of the disease has brought economic activity to a near stop.

As the chart below shows, whilst volatility (as measured here by the VIX) has fallen recently, it remains at the levels not seen since the depths of the financial crisis:

Source: FactSet

Readers of our previous communications will be familiar with our emphasis on professional portfolio construction and diversification. Given natural tendency to focus on equity markets, we would also like to highlight the following chart showing the changes in the UK government bond (Gilt) index versus those in the FTSE All Share:

This chart clearly demonstrates the extreme price movements we have seen in a, traditionally, lower volatility asset. However, the key takeaway from the chart is that Gilts rose in value in the early stages of the sell-off, providing valuable ballast to a well-diversified portfolio.

With apologies for sounding like a broken record, during periods of extreme uncertainty experience tells us that the best thing to do is often nothing. We have a tried and tested investment process with risk management at the heart of everything we do.

The Avellemy portfolios are well diversified across asset type, region, sector and style and we are comfortable that the portfolios are behaving as expected. and as a result, there will be no material change to our investment philosophy.

Next week sees some key economic data releases out of China which we, and the rest of the World, will be watching closely for any negative surprises. The consensus is for poor industrial output and retail sales but worse than expected data has the potential to exert renewed pressure on markets.

We will be back next week with another update and hope that you have found this one useful. As always, do not hesitate to contact your financial adviser with any questions.

In the meantime, stay well.