Written by 20/03/2020
We hope everyone is keeping well in these uncertain times.
With the speed of recent developments, we want to ensure communications are kept up this week. Many of you have been in touch with us during this period and hopefully, those calls have been useful.
As we get deeper into this COVID-19 period it's key we keep rationalising the situation.
The current levels of volatility are unprecedented, and we are at a stage of ‘fear’ in the attitudes of investors. Yesterday saw large moves in the dollar; partly due to business increasing their cash reserves to meet future liabilities, but just as in any point of market crisis the dollar is the preferred choice of many. We saw this in 2008. While it puts further strain on asset classes such as the £ it will be the cash that comes back into markets when a correction materialises. The extent of the liquidity squeeze yesterday was deeper than I thought and whether this is short-lived or longer term will prove a pivotal point of this pullback.
Focusing on the UK, yesterday we saw the suspension of several UK property funds, which; on one hand, create flash negative headlines, however, on the other, it does protect long term investors in these funds with their physical assets. It does, however, mean we now don't have the same ability to sell down these particular funds and return investors capital. We will keep you posted on the replacement allocation for any new contributions into the portfolios. I know the investment team have prepared a separate note on this so I will allow that to further explain the implications.
Oil adds further challenges to the market, with continued actions of increasing supply (from the Saudi’s) in a time of lack of demand, this has meant we have seen prices drop to mid-1980's levels of $25 on Brent Crude and Sub $20 briefly today on US Crude. This will have long-lasting impacts on oil business and the worrying start of downgrades of oil firms to ‘junk’ status today has given all credit markets a violent shock.
See a picture (below) of the oil forward curve which has a short-term pricing to current levels but not a flattening by any means. In Cape Berkshire, we added a small position on Monday and despite further drops yesterday we will, as with all asset classes, keep an eye on this for the opportunity to add if we see fit. We have a call with an excellent natural resources fund manager today, so will inform you further after that, if necessary. Ideally, we would have waited 2 more days to invest, but we simply are not trying to call a bottom to something with truly record-breaking levels of volatility
So, that's three pieces of negative press, but we feel two of these will be challenged in the coming weeks by investors who see a buy opportunity. Every day there are more promises of fiscal stimulus from Governments and Central Banks, despite the Fed cut on Sunday being seen by many as 'throwing all their monetary tools at the issue', we think it showed the lengths they are willing to go in order to support the economy. This has been followed by a more unified ECB package that will again be huge in size at some €50 billion in support. This will be a liquidity tool that will buy all Government, including Greek, debt as well as buying corporate bonds. This is something not even the US has decided to do yet. Governments know, that to avoid a long deep recession, these are the steps they must take.
Global reports on the COVID-19 show China suggesting that new domestic cases are flatlining, with two consecutive days of no domestic cases, which is positive for China, but it foreshadows some of the lengths we are potentially going to have to go through in the UK to mitigate the spread. South Korea also seems to have their spread now under control and the US seem to be leading the race for some form of a vaccine. Although, perhaps Mr Trump went too far with the mention of a Malaria related vaccine being effective ahead of the health departments approval!
Our advice to clients during this time is to keep in contact with your advisers and the investment management team, we will continue to send out regular updates. The decision of whether to increase or decrease risk by moving up or down a portfolio has really been driven at an individual level. If you wish to take an increased cash position for a short period we see this as a better option to large liquidation.
Now is the time to look at reducing unnecessary expenditure in order to avoid depleting assets at an already depressed level. Perhaps more easily done with more and more borders closing restricting travel and holidays planned, but other projects, like extensions, can be deferred in order to mitigate drawing down on an asset and realising a loss.
As touched on in my last note, we would stress again the efficiencies in our investment process in the Cape Berkshire Discretionary proposition – If you require more information on our discretionary proposition, please contact your adviser.
We do currently have some cash in the Cape Berkshire portfolios and we will look to get this invested on days I feel are most stretched. We do this knowing it could well drop lower the next day but with the volatile 10 days we have had with the stock market, circuit breakers on 5 of those in a row, shows an exact entry point is impossible to predict. We are increasing our planned fund manager meetings for the next 3 weeks, all by video/telephone, and these will pivot where we focus on any changes.
On the subject of the forced working practices, I believe this will be looked back upon as a turning point in the full adoption of technology within many industries. I also think it will show that business can operate more efficiently by adopting these practices and as such a lean model will evolve. At SWWM we were well on the way to implementing this but for this to be more widely adopted will aid the next stage of the economic cycle. As with the 2008 crash, we had the Amazons and Apples go on to dominate US market share and if we can remain, long term investors, I truly believe we will again look back at this as a major pullback but one I am confident we will get through economically, returning to and superseding previous portfolio levels.
As ever, please get in contact if you wish to discuss anything further.
We wish all our clients and families the best during this time.