Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The coronavirus lockdown has already given us considerable pause for thought and a surfeit of time for reflection. The next few weeks also promise to be a time for assessing what has gone before as well as looking to the future.
On the one hand, countries and companies too are set to report how much the coronavirus lockdown has impacted their economic performances in the first quarter of the year. From a markets perspective, the most important question will be how consensus expectations compare with reality.
At the same time, the world prepares for a phased exit from lockdown conditions. Countries and economic sectors are widely expected to proceed towards a new “normal” at differing times and rates, with the US, Germany, Spain and Italy among the first western countries to announce a loosening of measures1.
In market terms, the outlook trumps the past, so progress towards restarting the global economy is much more likely to determine the future path of markets than historic data recording the damage done so far.
Having said that, the near future is bound to present further hurdles. In July, for instance, we shall be reflecting on another quarter in which the world’s economies and corporate earnings were under immense pressure.
The UK government’s independent forecaster, the OBR, issued a stark assessment of the future this week, saying the British economy could shrink by 35% this quarter as UK unemployment rises to 10%. It also said it thought the economy could bounce back quickly, assuming a three-month lockdown followed by a partial lifting of restrictions over the following three months2.
For investors, the current process of looking both forward and back poses challenges. The experience of past investment successes versus disappointments risks colouring our views as to what to do next. Helpfully, we have some key markers in the shifting sands.
Thanks to the unprecedented responses of central banks to the pandemic, interest rates are now close to zero almost everywhere. That should be a big help to both consumers and businesses, reducing their costs when the world starts to get back to work.
The oil price shock of March 2020 is also a tailwind to most, with oil producers and electric vehicle makers and their suppliers perhaps being the main losers. Notwithstanding the oil production agreement reached this week between Saudi Arabia and Russia, oil faces an uphill struggle against burgeoning stockpiles and reduced global demand3.
We’ve also seen the return of quantitative easing – essentially large bond buying programmes by the world’s central banks. That should help to underpin asset prices generally, although the low bond yields likely to result from QE combined with near-zero interest rates will remain a depressant on banks. Their profits depend partly on having a reasonable gap between short and longer term borrowing costs.
Increased government spending on anti-coronavirus measures is already and will likely continue to provide support for the pharmaceuticals industry and new or emerging businesses with solutions in testing and protection. Other government spending targeted at getting the world back to work should favour infrastructure providers.
Perhaps the most important point to remember is that crises are not the time to be derailed from a long term investment plan. The global financial crisis in 2008 seemed as if it would change the world forever. It did, and some of its effects persist until this day. However, it also paved the way for one of the longest bull markets in history, with new sets of winning and losing companies.
Another period of great differentiation may now lie ahead. That suggests actively managed funds as opposed to those designed to closely track a stock market index have the potential to provide the best route out of the current crisis, other than for investors keen to keep their annual management costs to a minimum.
Importantly, active managers will have the flexibility to back winning companies while avoiding or de-emphasising index heavyweights under pressure.
High quality smaller companies may find themselves with fresh tailwinds. Their ability to adapt relatively quickly to a changing operating environment could be a valuable asset in the world yet to come. They could, for example, benefit from a possible adverse reaction from both other businesses and consumers to relying on global supply chains when local sourcing is available.
The big caveats here are that some smaller companies with weaker balance sheets may not make it to the recovery stage. They may also be late to participate in the next rally in global stocks, as any large-scale reallocation of cash into equities is more likely to be focused on the world’s big names. As ever, selecting a manager with proven skills will be essential.
The trade-off between stocks considered to be growth or value oriented is likely to remain hotly contested by the advocates of each. Companies able to deliver secular growth may remain highly prized in a world where the growth of others has been severely curtailed.
So far this year, some leading growth stocks in the US like Amazon, Apple, Microsoft and Tesla have stood investors in good stead, producing gains or only marginal losses4.
However, the ample liquidity provided by central banks and governments could provide a boost for value stocks – in sectors such as retailers and industrials – as that liquidity is eventually put to work in the real economy.
One thing that will not change is the need to maintain a diverse investment exposure, so as to capture some of the growth from rebounding share prices – when that comes – while de-emphasising the impact of investing mistakes.
Fidelity’s Select 50 list encompasses funds with a variety of investing styles as well as funds investing in and across the main asset classes – equities, bonds, property, gold and infrastructure. As such, the list provides plenty of ideas to tune up an investment portfolio.
For investors seeking to diversify away from the UK, the Rathbone Global Opportunities Fund and Fidelity Global Dividend Fund offer contrasting routes. The former is unmistakeably a growth oriented fund, currently with a high exposure to the US and technology companies in particular. The latter is much more defensively positioned, offering an exposure to value oriented stocks around the globe. Combining the two would provide a more balanced exposure to world equities than investing in just one.
Investors can find similar variations in style applied to individual markets too. In the UK, for example, the Select 50 list includes the Liontrust UK Growth Fund drawing on a proprietary approach Liontrust calls its Economic Advantage investment process. In essence, this process aims to capture the key structural growth themes that will shape the future global economy5.
The Franklin UK Equity Income Fund has a contrasting investing approach, targeting UK companies either paying dividends at a sustainable premium to the market or offering dividend growth in excess of the market income growth rate.
Finally, a number of “go-anywhere” funds on the list offer an exposure to smaller alongside larger companies. These include the Fidelity Special Situations Fund and the JOHCM European Select Values Fund, while the Schroder US Mid Cap Fund offers diversification opportunities away from America’s well-trodden household names6.
1 BBC News, 15.04.20
2 OBR, 14.04.20
3 New York Times, 13.04.20
4 Bloomberg, 15.04.20
5 Liontrust, February 2020
6 JO Hambro Capital Management Group, 31.03.20
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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