13th April 2020
Market Commentary April 2020

market comm web

My first thoughts go towards you and your family in what is a challenging time for us all. If there is anything that we can do for you at BRI then please don’t hesitate to get in touch.
The world has changed in the last few months. Change on such a global scale usually takes decades to come to fruition but what we’ve seen happen in the last two months has been quite remarkable. We’ve tried to communicate regularly with you through these tough times and it would be foolish of me to labour on what happened in January and February given that the world is changing rapidly on a day by day basis. What I will try to do is focus on what is happening now and what may happen in the future. As you will most likely be reading this several weeks after it was written, it’s worth noting that this was during the week commencing 6th April and any opinions or facts stated below may have changed significantly by the time you read it.

Markets have rallied aggressively over the last week or so, up 16% since the lows. This has been driven by a bit of overselling, quite a lot of private investors re-entering the market and light at the end of the tunnel in terms of the healthcare crisis.

However, we believe that the market is not fully appreciating the economic impacts of the current virus. We are in an economic crisis which will see substantial rises in unemployment within weeks and double-digit declines in GDP. As a result of this, consumption is declining significantly, and it is tricky to see a quick road to recovery.

Yes, the lockdown will probably end sooner rather than later, but the economic consequences will last for some time. Businesses will be reluctant to quickly rehire everybody and consumers will be prudent with their consumption. Markets like the prospect of eye-watering amounts of government fiscal and monetary intervention, but this is slow to reach businesses and consumers that are in need. This is turning out to be the worst economic crisis that any of us have witnessed. The question remains as to whether the recession and recovery will be ‘V’, ‘U’, ‘L’ or ‘✓’ shaped. My suspicion is that it will be somewhere between ‘U’ and ‘✓’ shaped. Also, one must bear in mind the chances of secondary outbreaks once lockdowns are rolled back. It is a tricky process to roll back the lockdown as you increase the chance of the virus spreading, but you hopefully put the economy on firmer footing. However, if you do it too soon then the economy will just re-enter lockdown.

Markets are forward looking and so they will be thinking about this question and some of this may or may not be reflected in the current level of the market. I believe that markets are not expecting significant earnings downgrades at the moment and are still pricing assets based on dated fundamentals. This is wrong. We think that once markets start to get to grips with the severity of the economic pain and the knock-on impact on companies, they may come down a bit further.

Consensus expectations for corporate earnings in America earning are minus 12% for the second quarter of this year and minus 3% for 2020 as a whole. We think these are too positive and that equities will start to reflect the actual reality sooner rather than later.

We believe that the rally we have seen in equities is what is known as a bear market rally. Meaning that markets can rally in the short term, but we still expect a bit of weakness going forward. This rally has been compounded by quarter end rebalancing (pension funds rebalancing portfolios) and retail investors seeing light at the end of the healthcare crisis tunnel and misconstruing that as the all clear signal for markets.

We also have some technical drivers that are starting to impact markets. Share buybacks (where companies buy back their own shares) in the US are c.$1tn a year and these are likely to stop. Either by the volition of company boards or because it is mandated for any company that accepts government funding. This large amount of demand for stock from American companies will cease and clearly not underpin the market. The other issue that we are seeing is companies coming to capital markets in order to raise more cash. We’ve had a few of these over the last week or so and these are companies that you would expect to raise money (travel, leisure and retail) and we are likely to see more of this. However, we’re now seeing companies raise money that want to err on the side of caution. This makes sense for several reasons. A) to shore up the balance sheet even if it’s relatively secure and B) to get ahead of other companies and the stampede for capital that is likely to ensure over the coming months.

What does all of this mean for your portfolios?

Well we have a plan and we will execute on that plan. We’re awaiting further economic data and a few other bits of data before deploying meaningful amounts of capital, and any deployment will be gradual. It is worth bearing in mind that it is almost impossible to call the bottom of the market, it is just luck. We’re not seeking to find the bottom, but gradually deploy capital into companies with attractive long-term fundamentals at attractive prices. However, it is important to bear in mind that short term movements in the market are speculation, it is roughly a 50/50 chance whether markets go up one week or down. We are investing for the long term and I have every confidence that markets will be higher in the medium term than they are now. Our plan is based on our long-term views of how the world will change and how it will look in the future and we are focussing on companies that have very strong long-term fundamentals.

However, it is conceivable that our plan may have to change. It reminds me of a quote from Mike Tyson, ‘Everyone has a plan ‘til they get punched in the mouth’. The metaphorical punch in the mouth that markets may deliver means we have to be prepared to challenge and change plans as new information and conditions arise. This could lead us to selling equity, this could lead us to going heavily overweight in fixed interest or this could lead us to increase our international exposure. Our plan still stands under current market circumstances, but we won’t know that we have to change it until we know. John Maynard Keynes once wrote that ‘When the facts change, I change my mind. What do you do, sir?’ Facts are changing minute by minute in the current environment and our plan needs to be flexible and nimble.

We have a plan, we may need to change that plan, but we will execute our plan.

I feel that this sorry saga has further to run and in the words of Churchill ‘Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning’.

We will keep up regular communication with you via phone calls, emails, market commentaries and video interviews. Please let us know if we could be doing anymore for you in these challenging times.

Dan Boardman-Weston
Chief Investment Officer