Economic & Political Roundup
Kindly sponsored by Allianz
A collation of recent insights on markets and economies taken from the comments made by chairmen and investment managers of investment companies – have a read and make your own minds up. Please remember that nothing in this note is designed to encourage you to buy or sell any of the companies mentioned.
The rally in markets was reinforced, as the ongoing impact of stimulus and the easing of lockdowns acted as catalysts for the wider participation of cyclical sectors, such as energy and banks. The recovery in the oil price was particularly strong. Led by the US, the market appears to be preparing itself for the next business cycle. Although this is set against a backdrop of the global economy entering what many observers believe will be the most severe slowdown since the 1930s.
|wdt_ID||Exchange Rate||31/0520||Change on month %|
|1||GBP / USD||1.23||-2.00|
|2||USD / EUR||0.90||-1.40|
|3||USD / JPY||107.83||0.60|
|4||USD / CHF||0.96||-0.40|
|5||USD / CNY||7.14||1.00|
|wdt_ID||Commodity||5/31/2020||Change on month %|
|3||US Tsy 10 yr yield||0.65||2.10|
|4||UK Gilt 10 yr yield||0.18||-20.30|
|5||Bund 10 yr yield||-0.45||-23.80|
Acceleration in digitalisation and healthcare innovation?
AVI Global’s manager, Joe Bauernfreund, expects the impact from lockdowns to be felt across both the supply and demand-sides of the global economy. In his review of global equity markets, Majedie’s CEO, William Barlow, says the UK was particularly hard hit for two reasons; its heavy exposure to banks which are now discouraged from paying dividends and secondly the collapse in the oil. He expects stock picking and fundamental analysis to come to the fore in the current climate. Scottish Mortgage’s manager, James Anderson, says that as investors they would like to see the current crisis provoke a further acceleration in digitalisation and healthcare innovation. As observers they would hope that the current crisis will prompt increased concern over the threat driven by other extreme outcomes in inequality or climate decay.
A once in a decade opportunity to add cyclical names, though patience will be needed
BMO UK High Income’s manager, Philip Webster, says that there is a once in a decade opportunity to add to some of the more cyclical names they hold which have been impacted most, although for now patience is required.
The chairman of Chelverton Growth, Kevin Allen, believes that as more people return to work, there will initially be a sharp upturn followed, over time, by a slower growth in economic activity.
The agility and flexibility of smaller companies can be an asset in crisis-times
River and Mercantile UK Micro Cap’s chair, Andrew Chapman, notes that while smaller firms tend to lack the formalised planning and resources of larger businesses, they do benefit from agility and flexibility in times of crisis. In the wake of the unprecedented steps taken by Chancellor, Rishi Sunak, Andrew adds that it remains to be seen to what degree this will ensure that the banks unblock this provision of finance.
Thomas Moore, manager of Aberdeen Standard Equity Income, says that it is important to remember that markets tend to move several months ahead of economic data. Just as in 2009, negative sentiment has created asymmetrical risk/reward for investors willing to remain focused on stock-level opportunities. Thomas adds that, on a quarter-on-quarter basis, economic activity should start to show a sequential improvement in Q3. Investors will not wait for year-on-year growth to turn positive before they start to buy cyclicals.
Adam Avigdori and David Goldman, representing the manager of BlackRock Income And Growth, discussed the cuts and suspensions to dividends, by companies such as Shell.
2020 to be the worst year for global growth since the 1930s
Schroder Income Growth sound a cautionary note, saying that their economics team expect 2020 to be the worst year for global economic growth since the 1930s, and very few holdings will be immune.
Aurora say that they have used the drop in share prices to invest the cash in the portfolio at very attractive levels. They have looked to purchase at one-third of intrinsic value (i.e. with 200% of upside) even adjusted for the impact of covid-19.
Many investors do not focus enough on the ‘survivability’ of a business. Also, subscription-based models have been much less affected
Nick Train, of Finsbury Growth & Income, says that that Lindsell Train have always thought that other investors underestimate the value of “survivability” in a company. Nick contrasts the relative prospects of companies with subscription-based models, many of which the fund holds, with business models whose sales have effectively been suspended in the current crisis – such as airlines and high street retailers.
The chair of Troy Income & Growth, David Warnock, believes it is unlikely that the speed at which the global economy has entered this crisis will be mirrored by the rate of recovery. In his view, the impact on listed companies and their ability to pay dividends will be widespread – only time will tell whether these cuts will be temporary or permanent.
Keystone’s manager, James Goldstone, discusses the extent of fiscal and monetary stimulus globally. He says that the fiscal and monetary response has been hugely decisive and has represented an intervention by the authorities on a historic scale. However, this support comes at a cost. Both in the UK and elsewhere, these programmes have been funded by an expansion of central banks’ balance sheets on a hitherto unprecedented scale. In the US in particular, the pace of expansion (from below $4tn to almost $7tn) and the broadening of the asset base that qualifies for purchase has been breath-taking.
Recovery in stocks has been nearly as swift as the initial sell-off
Franco Tapia and David Zhao, from BlackRock North American, reflect on the surge in stocks over April. The rebound was as swift as the selloff. The team discuss attribution over recent months. Technology-focused holdings have been performing especially well.
Peregrine Moncreiffe, chair of North Atlantic Smaller Companies, says that once we move into the mitigate phase, there should be some return to some normalcy and economic growth with the restoration of supply chains and consumer demand. He adds that valuation of the fund’s positions in the pharmaceutical and medical testing sectors should continue to see support.
The banking sector is much better positioned than it was in 2008. Shareholders, though, have been relegated further down the pecking order
Henderson European Focus’s managers, John Bennett and Tom O’Hara, discuss the state of the banking sector. Banks, courtesy of much tougher regulation since the global financial crisis, seems better prepared than usual. That preparation now includes the forced ‘postponement’ or cancellation of dividends. They note that shareholders in banks are now relegated further down the pecking order, more than a decade after what many saw as the great bailout of ‘greedy bankers’ at the expense of the wider workforce.
We also hear from Matthias Siller, Maria Szczesna and Adnan El-Araby, the managers of Baring Emerging Europe. They note that Russia, has long since prepared for a low oil price environment. Through a substantial build-up of its currency reserves and the implementation of a counter cyclical fiscal policy, Russia is able to support budget spending in a low oil price environment while saving extra revenues during periods of high energy prices. Looking forward, they believe that covid-19 will amplify many existing secular economic trends and reward prudently-run companies with market share gains while rooting out weaker players. In this vein, corporate earnings will once again become the decisive determinants of share prices and dividend recovery across the Emerging European universe.
The pandemic has accelerated trends across Asia Pacific, such as e-commerce growth, more widespread use of mobile and PC gaming
JPMorgan Asia Growth & Income’s management team, comprised of Ayaz Ebrahim, Robert Lloyd and Richard Titherington, discussed the impact of the pandemic on trends. Some of the bigger trends that have been happening in Asia and across the globe, such as e-commerce growth, more widespread use of mobile and PC gaming, as well as lower interest rates, are mostly all being accelerated.
Schroder AsiaPacific’s chair, Nicholas Smith, says that there are grounds for some optimism. Asia was the first affected by the virus, and parts of the region are among the first to unwind the lockdowns. Secondly, Asia has a history of reacting well to shocks.
Aberdeen Asian Income say that as a result of the rally in growth stocks over the past year, good quality dividend-paying companies are trading at relatively attractive levels,
Susan Platts-Martin, chair of Witan Pacific, says that in mainland China, long-term growth forecasts remain strong. Some sectors such as travel, will be much more hurt than others, and some companies will be casualties of the imposed tough operating conditions.
Any recovery in Brazil will be uneven, at best
Ed Kuczma and Sam Vecht, representing the manager of BlackRock Latin American, expect lockdowns to ease modestly by June and more significantly in the second half of the year. Activity in the industrial sector and in parts of services where “social distancing” is less of a concern should rebound relatively quickly. The team do not expect most economies to return to their pre-crisis levels of GDP until 2021.
Aberdeen Latin American Income’s chair, Richard Prosser, says that mixed data in Brazil indicates that any recovery remains uneven at best, particularly as countrywide lockdowns will result in a decline in business activity. Richard also discusses Mexico, Argentina, and Chile.
High yields in particular will probably lag the recovery, and this includes CLOs, which holds high yield rated leveraged loans
We hear from Pollen Street Secured Lending, who say that a number of structured borrowers have asked for temporary amendments to their facility to reflect the regulatory guidance on forbearance requests as well as a deterioration in underlying economic conditions.
Honeycomb say that the SME segment has seen the biggest initial impact from the covid-19 restrictions with forbearance and missed payments at 20 per cent of the portfolio at the time of writing. In most agreed forbearance plans borrowers are still paying at least the full interest payment.
In the view of TwentyFour Select Monthly Income, as rating agencies begin to analyse corporates for the new economic reality, ratings will ultimately be cut, but it’s too early currently to say what the impact will have, but high yields in particular will probably lag the recovery, and this includes CLOs, which holds high yield rated leveraged loans.
VPC Specialty Lending do not anticipate a “V” shaped recovery, but instead expect the global economy to remain depressed for an extended period, albeit with lockdowns easing gradually in the coming months. They also discuss why they believe that ‘duration’ is a misunderstood risk.
Blackstone / GSO Loan Financing discuss the outlook for global default rates, noting that as of 31 March 2020, the trailing twelve-month default rate was 1.6% in the US and 0.5% in Europe (according to Credit Suisse). They expect that these will continue to increase throughout 2020.
Credit spreads offering some of the best value in several years
Invesco Enhanced Income’s management team, comprised of Paul Read, Paul Causer and Rhys Davies, believe that credit spreads still offer some of the best value we have seen for many years. That said, there are undoubtedly challenging times ahead for many companies and default rates are likely to increase.
Defensive nature of infrastructure investing is being put to the test. Despite re-pricing, volatility in public market benchmarks and stay at home and social distancing policies, will make it hard to price and diligence investments in infrastructure assets
GCP Infrastructure’s chair, Ian Reeves CBE, says that the company’s focus on availability-based assets has meant the loan interest income received by the company has not been, and is not expected to be, materially impacted by the covid-19 lockdown.
3I Infrastructure’s manager, Phil White, believes that the defensive nature of investing in infrastructure is now being put firmly to the test and some assets are experiencing stress beyond that seen during the Global Financial Crisis, especially those connected to the transportation sector. He adds that, despite the re-pricing of many assets, new investments will become increasingly difficult to execute the longer the covid-19 crisis goes on. Volatility in public market benchmarks and stay at home and social distancing policies, will make it hard to price and diligence investments in infrastructure assets.
We have also included comments on the flexible investment sector from Capital Gearing, Caledonia and Livermore; Japan from JPMorgan Japanese; China from JPMorgan China Growth & Income; global emerging markets from BlackRock Frontiers; Thailand from Aberdeen New Thai; Biotech and healthcare from Polar Capital Global Healthcare; growth capital from Adamas Finance Asia; Infrastructure securities from Ecofin Global Utilities and Infrastructure; commodities and natural resources from BlackRock World Mining; UK property from Urban Logistics REIT, Standard Life Investments Property Income, Ediston, LXI REIT, and Residential Secure Income; European property from Aberdeen Standard European Logistics Income and Tritax EuroBox and Property securities from TR Property.
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