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10th July 2020

Graham BentleyGraham Bentley

Avellemy Commentary for June 2020

As I look out of my 'at home' office window, thunder echoing and rain cascading like stair rods, I am reminded how fortunate we've been to bear the majority of lockdown in warm sunshine.  The last quarter has been rather clement too where stock markets are concerned; while the first 3 months of the year saw the typical medium-risk portfolio fall by around 15%, much of that has been recovered by the end of June.  Indeed, not only have traditional safe havens done well, eg Gold is up 18%, but a number of more traditional areas have shown very strong advances in share prices, including firms in the US and Asia, particularly in smaller companies and Technology.

The question that remains is how robust this 'V-shaped' recovery may be.  One might have expected the share prices of companies with weaker balance sheets - suffering yet further through lockdown - to have been left behind while stronger companies recover more quickly.  However, by mid-June this had not been the case either in the US or UK.  It appears that investors in the round believed any recession would be short-lived, and that some unprofitable (and approaching insolvency pre-lockdown) companies would not need to be hospitalised.

Central banks' willingness to buy the debt of their respective governments and companies is a driver of that confidence.  The Bank of England's total injection of £745 billion via its quantitative easing (QE) programme not only keeps the benchmark Gilt yield low at around 0.2%, but interest rates in general.  However, buying back corporate debt in turn keeps businesses afloat, some of which (particularly in the US market) are thus rescued from otherwise imminent collapse, while perhaps more deserving smaller businesses who do not use debt markets are left to flounder.  No wonder the prices of higher yielding bonds shot up by 10% this quarter.  This approach requires ultra-low interest rates, thus forcing you and me to lend money to the Banks (ie by depositing cash) or the Government at miserly rates - indeed Cash funds were among the worst performers over the last 3 months.  When cash returns next to nothing, riskier assets become the only game in town.

Governments have come under pressure to relax lockdown conditions.  In the UK, curtailing the furlough scheme in August will almost certainly result in increased redundancies.  In the US, the $2.2 trillion CARES Act that paid the unemployed an additional $600 a month during lockdown ceases from the end of July, as the White House administration sees it as "a disincentive to work". As a consequence, economies have started to reopen and the early data shows positive signs of an economic rebound in the UK, Europe and the US, as you might expect. 

However, the debate about saving lives versus saving economies has become acute.   Most countries put lives first - COVID data in Europe indicates lockdown relaxation is being handled carefully as daily new cases continue to fall significantly.  UK daily new cases have fallen from a peak of over 8,600 in April, to a 7-day average of less than 650 as I write, and total weekly deaths now back to the 5-year average.  Businesses can be hopeful of a busier holiday season as a result.

In the US however, states' respective lockdown relaxation efforts reflect party lines, with 'red' Republican states like Arizona and Texas being early adopters of President Trump's directives for Americans to be 'warriors' and get back to work.  This has unfortunately led to a 150% rise in daily new active cases in just 2 weeks since mid-June - now over 50,000 a day and rising.  Sixteen states have reintroduced lockdowns as a result.  From an investment viewpoint, it is rational for markets to react badly to increased COVID transmission rates, and to favour economies where the virus appears to be under control. On that basis, Europe China and the Pacific Rim may seem more attractive than might otherwise be the case, relative to the US.  Again, with so many variables in play, a risk-matched asset allocation strategy remains the sensible option.

And finally, after 3 months of Microsoft Teams schooling, my 13 year-old has been at home with us for 105 days.  I find myself surprisingly familiar with an X-Box, and the immersive cowboy outlaw game 'Red Dead Redemption 2' (ask your kids).  Entering a 9-week summer break, his newfound sporting preference would involve my obtaining a shotgun certificate.  I can only hope the two are not related...

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