May 2020 Review
Unlocking Was Key
May saw a continuation of the rally in risk assets that started at the end of March and continued through April. Growth equities were the winners in May especially in technology sectors benefiting from restricted economies and the resultant expansion of the digital economy. Later in the month, some of the big ‘tech’ companies came under fire for their market dominance. That coincided with a minor rotation into ‘value’ stocks based on an historically high dispersion between the technology-based growth companies and those companies challenged by the enforced lockdowns due to the Covid-19 coronavirus.
Greater confidence in an economic rebound resulted from the gradual easing of lockdowns, principally in the developed economies. That confidence was the major impetus behind rising share prices and indices in May which were occasionally buffeted by President Trump’s confrontational language over China and latterly, his spat with Twitter.
Smaller companies continued to perform well in absolute and relative terms, continuing a trend that started last month. Income investors remained concerned about dividend policies and the ability of a number of companies to maintain dividends. Despite the end of month modest rotation in favour of challenged business sectors affected most by the movement restrictions imposed on populations, it was the high growth, technology-based companies with low levels of debt and products or services in demand, that delivered the best performance.
TINA & TARA
Both girls’ names but acronyms as well. The first more frequently used than the second.
TINA (there is no alternative) has been used by investors and commentators to describe the investment landscape that favours equities against the backdrop of low yields on bonds, negative for some governments, and do you get paid enough to take on junk/high yield credit risk? The TINA term has been used before, only for government bond yields to decline further as the need for a safe-haven overwhelmed any form of risk-taking in other assets due to Covid-19. However, as we have seen this year to date, not all equities are equal as was the case in April and May and mentioned above in the introduction.
In previous blogs we have mentioned the importance of sorting the growers from the grinders and those that fall under the third ‘G’, good riddance. It has been important to differentiate between them. For example, cloud computing and cybersecurity are growth themes where demand is strong and are likely winners. Banks are typically regarded as ‘value’ stocks that would be expected to perform in a healthy economy with a normally shaped yield curve (long rates higher than short rates). They are beneficiaries of a valuation rotation and are grinders, delivering a relatively modest return outside of a financial credit crisis. Industries like airlines will be challenged for some time and without government support, many will fail as will traditional retail disrupted by technology – think Hertz and JC Penney. So, with interest rates at such low levels, it is tempting to think there is no alternative to equities but what type of equities you own is key.
TARA (there are real assets) is rarely used but with income investors soured by disappearing dividends, turning to credit risk in order to maintain a level of income has its own issues – you need to know your credit risk, the Federal Reserve isn’t going to underpin the whole of the US high yield market. Yet there are real assets with either an explicit or implicit link to inflation closer to home. The listed equity structures that are investment trusts contain a number of vehicles that offer attractive real yields and sustainable income streams. Consider investment trusts or companies that own in-demand assets like last mile distribution centres or high-quality care homes that are let to financially sound operators at rents linked to inflation. Not fixed income, better than that, re-pricing income in the holders’ favour. Investment trusts had a bad time in mid-March when liquidity was poor and these daily-pricing assets were marked down to avoid emotional or forced sellers. Market liquidity has been aided by massive central bank support, so a repeat of mid-March’s illiquidity is unlikely. Most investment trusts (aka Investment Companies) have rebounded strongly as the following chart from Winterflood Securities illustrates.
Yields on the traditional safe-haven assets like government bonds edged higher in May. Ten year government yields in developed markets are between 0.75% to minus 0.35% yet still not much of an attractive asset to own. You may have noticed on the 20th of May that the UK government borrowed £3.75 billion for three years with an average yield of -0.003% – buyers effectively paying the government to buy their debt. With UK ten year bonds yielding around 0.25%, given the vast amount of fiscal spending and therefore borrowing to come, if I were the government, I’d be raising as much money as possible at those rates. You may have guessed that government bonds are not assets that will be found in our multi-asset Dynamic Fund, selected investment trusts as described previously, yes. Gold and cash are less unappealing assets when you look at government bond yields.
Both funds had strong positive months in May aided by their focus on the likely post-virus winners and the changes made to that effect in March, April and early May.