Summary

• Our Global Equity Income strategy declined 0.8% against the wider market which fell 1.1%. BAE Systems, Microsoft and National Grid performed particularly well in the month, however Shell detracted from performance as the company reduced its pace of share buybacks.
• In the month we added Legal & General to the strategy and further reduced our exposure to consumer staples including exiting the remaining small position in Anheuser Busch.
• The Coronavirus has had a real impact on global markets and may present opportunities to enter high quality commodity and Chinese exposed companies at depressed prices. The Global Equity Income is relatively well insulated from the direct effects of the pandemic.

Equity markets initially began the year strongly with high hopes of further progress on the USA-China trade deal and continued support from central bank policies. Mid-month recognition of the rapid spread of the Coronavirus had a negative impact on share prices. The Global Equity Income strategy ended the month declining 0.9% against the wider market which declined 1.1%.

BAE Systems was the strategy’s best performing holding during the month rising 11%. The firm agreed to acquire the Military GPS systems from United Technologies. The deal highlighted the valuation discount of the firm relative to peers and resulted in recommendation upgrades from a number of investment banks. Microsoft and National Grid also performed well.

At the other end of the spectrum, Shell detracted following weakness in end markets which produced results behind consensus estimates. Management reduced their pace of share buybacks. The oil sector is currently out of favour with investors and the company’s transition from an oil to an energy company will take some time. Shares of the whole oil major peer group trade on low multiples and offer attractive dividend yields. Shell is however more defensively positioned than other oil majors given a lower cash cost of production.

Exposures to consumer staples were further reduced in line with last month’s commentary. This included the sale of the small remaining position in Anheuser-Busch. The company provided one of the lowest yields of those held by the strategy. A new holding was established in Legal & General. The firm is a market leader in pension risk transfer and in total has over £1 trillion in assets under management. Shares provide a dividend yield of around 6%.

The speed of the spread so far of the Coronavirus has outstripped that of recent pandemics. This is due to a number of factors including the mass migration within China to celebrate the New Year and the two week period during which infected people show no symptoms but are contagious. Attempts to reduce the spread of the virus will reduce economic activity. This has already had a significant impact to the near term outlook of a number of sectors globally. Earnings estimates have fallen. Commodity prices, notably oil and copper have also fallen, given the reduction in marginal demand. The biggest impacts on the strategy will likely be felt in the oil sector holdings Shell and BP. These companies have significant flexibility in their capital expenditure commitments which should allow dividends to be un-impacted despite a temporary fall in the price of crude.