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Chief Investment Officer Update - 8th May 2020

08th May, 2020

We’re into May now and we’ve just had the strongest month in the stock market in over 30 years. The Irish government has published a roadmap for re-opening the economy, as other European countries and US states gradually ease their lockdown policies. The new virus numbers are slowing down and we’re beginning to see the light at the end of the tunnel. At the same time though, the economic damage is becoming clearer and the data is breaking new records on the downside. It’s not surprising that many investors are asking whether we have come too far too fast.

The Coronavirus

While percentage growth rates have slowed, the number of recorded infections worldwide is approaching four million, and sadly the death toll has passed 250,000. Even the United States, with the largest number of infections, is seeing a decline in new cases, although this is mainly driven by results in New York. That the lockdown has been effective is good news for sure, but it also illustrates the importance of continued vigilance. Until a vaccine is found, there will need to be distancing and safety policies in place to guard against a virus rebound.

The economic damage – Q1 was bad, Q2 will be worse

First we had China report their first negative year-on-year growth since quarterly records began in 1992. Then we saw the US economy shrink by 4.8% (annualised) in the first quarter, their worst reading since Q4 2008. Finally we had the Eurozone economy contract by 3.8% (not annualised), which was the worst quarter since Eurozone data began in 1995. While the Chinese economy is showing signs of recovery already, the later lockdowns in Europe and the US mean that their second quarter data will be worse than the first. The massive government support packages will be crucial to carry households and businesses through until the economy picks up again.

Oil – back in positive territory

After the surplus in unwanted oil and the lack of available storage in the US led to negative prices in April, the West Texas Intermediate (WTI) price seems to have settled back over $20 per barrel. However demand for oil is still down significantly in the locked-down economy. Production has been cut since the negative price shock, but inventories are still high and storage capacity low. Therefore there is still some risk in coming months’ oil contracts, and we note that retail investors, as often happens, were badly caught this time by the tricky nature of oil trading. The market has calmed, and lower oil production now may lead to higher prices in the future, but we generally caution against trading such commodities.

Stock markets – a narrow recovery

The recovery from March lows has been surprisingly fast. Perhaps not as surprising are the winners that have out-performed the market. Technology and healthcare sectors suffered less on the way down and have rebounded more. As an extreme example, Amazon (officially a consumer stock now) is up over 20% on the year. While we can understand the relative attractiveness of these companies in the new COVID-19 environment, it means that the market gains have been very narrowly focused in a few large US companies. We will feel more confident in the recovery when we see a broader range of sectors participate.

Our investment view

As we always stress, we try to take a longer-term view with our investment decisions. In our centrally-managed discretionary portfolios, we increased the equity allocation throughout March. Not because we foresaw the rally, but because we thought that the market sell-off had created a return opportunity on a 12-month horizon relative to cash or bonds. Now due to the unexpectedly strong stock market returns in April, the relative return opportunity has diminished and we are re-considering our overweight position. We have also raised our cash holding, to give us more flexibility to respond to further developments.  
 

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