Market Update: Situation Improving?

Situation improving…

Over the past few weeks we saw the Covid-19 data begin to improve globally. Last night the UK Government-enforced lockdown remains in place; however, as hopes grew for an eventual medical breakthrough, recent dialogue has shifted to one of when and how to reduce lockdown restrictions. We are not there yet, but the markets rebounded as they began to price in the improving direction.

The price of oil really did go negative…

A global recession is undoubtedly underway as consumer demand has all but dried up. This was aptly reflected through the price of oil, which for the first time in history, briefly priced negatively as very near-term oil supply exceeded both demand and available storage facilities. The global economic picture will likely remain bleak and worsen through the second quarter. However, as lockdowns are lifted through the summer months notably in Western Europe, certain US States, Asia and Australasia, we could see an improving economic picture through the second half of 2020.

The corporate picture…

It is early in the first quarter corporate reporting season, however, an expected trend is appearing with earnings growth falling dramatically through those companies exposed to consumer discretionary spending, corporate and consumer borrowing, industrial related activities, mining and energy. Most notably we saw Royal Dutch Shell announce their results showing plunging profits and a dividend cut for the first time since the Second World War. This is likely a short term decision in reaction to the economic shock we are currently experiencing. Other sectors continue to perform well including companies involved in healthcare, consumer staple spending and technology as their businesses models have been boosted by the global lockdown.

The NMC situation…

NMC was until recently a FTSE 100 listed healthcare company. With exposure to healthcare services across the UAE, the fundamental picture was positive especially as Covid-19 became a global pandemic. However, recent investigations uncovered fraudulent activity at NMC with regards to undisclosed borrowing totalling in excess of £5bn. As loans have recently come due the firm was unable to pay and in effect went into default.

NMC has just been de-listed and is now in the hands of the administrators. Whilst we wait to see how this situation is progressed, it is deeply disappointing for a FTSE 100 company to suffer such a fraud, misleading UK regulators, the exchange, the rating agencies, the analyst community and most importantly investors. We will undoubtedly see changes in the accounting world and corporate disclosures as a result of this; lest we hope to never see a scandal like this again.

Equity markets positive through April…

Equity markets were positive through April with the FTSE 100 closing the month up 4% and the U.S. S&P 500 up 12.7%. Since the start of the year markets remain down: FTSE 100 down 21.8% and the S&P 500 down 9.9%. At the time of writing the positive trend continues reflecting the hope of a rebound in economic activity as lockdowns are lifted across the world.

Bespoke Portfolio Service: Activity update…

As we recently telegraphed the bespoke investment management team took some profits by reducing the exposure to the US equity markets following such a strong run. Cash will be held awaiting an improved entry point and where we will likely invest in the US.

Hardy Managed Portfolios: Activity update…

Similar activity has taken place on Hardy Managed Portfolios. We invested ~5% cash into equity markets very close to the lows in March and took profits after markets rallied towards the end of April. It is highly unusual to be so overweight cash as we are at present, but we remain overweight to equity risk and underweight corporate bonds where we feel the potential returns do not justify the increased risk we see in this space. We have been out of property since Q4 last year, avoiding the wide-scale gating of property funds, and are in no rush to reinvest.

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