Summary

• The US continues to be the centre of the Covid-19 crisis, as the number of infections passed the one million mark by the end of April, the most of any country globally

• Markets buoyed by optimism that the rate of new infections in Europe were beginning to slow, and that many areas were starting tentative re-openings after severe lockdowns

• MSCI All Countries Index rose by 10.6% in April, while the S&P 500 Index in the USA rose by 12.7%

• US Treasuries yields remained at the bottom of their range, roughly flat for the month around 0.6% for 10 year bonds

• WTI oil prices plunged briefly to US -$37 per barrel intraday during April, as oversupply issues related to lack of storage and physically settled futures contracts overlapped. Spot prices remain fairly flat over the month but are still around 20 year lows

• German Constitutional Court rules that ECB’s bond-buying programme violates German law, meaning that unless ECB responds appropriately, the Bundesbank would have to pull out of ECB programme. 

Market update

Global equity markets were buoyed by optimism that the worst of the Covid-19 pandemic was over, as the rate of new cases of infection declined in most countries.  The notable exception was in the USA where total cumulative cases passed the one million mark.  Despite this, many US states announced plans to begin re-opening businesses as the economic toll of lockdown continued to cause enormous job losses. By the end of April, the cumulative initial jobless claims had reached over 30 million since mid-March.

Nonetheless, the MSCI All Countries Index rose by 10.6% during the month and the S&P 500 Index rose 12.7%.  Equities in Emerging Markets (EM’s) were less impressive though, only rising 9% globally, as concerns about the economic resilience of global EM’s remained.

A notable feature of the markets during April, was the extraordinary developments in the oil price, and specifically in the price of WTI Oil.  During April, the spot price briefly dropped intraday to a low of US -$37 per barrel, as the lack of storage space in Cushing, where WTI Oil is stored, overlapped with the roll-over of futures contracts, which in the case of WTI Oil, is physically settled rather than cash-settled, as is the norm in Brent oil.  Although the time spent in negative territory was brief, the message regarding the lack of supply-demand equilibrium was clear – too much oil supply, too little demand, and not enough space to store the excess.  It is expected though that oil prices, despite remaining at 20 year lows, will rise steadily as the global economy recovers during the course of 2020.  Current consensus forecast for Brent Crude Oil prices for example, is for prices to rise from a spot level of around US$30 to US$35 by end-2020.

In other commodities, the picture also remained grim, with the CRB Spot Raw Industrials Price Index declining a further 2% in the month, bringing the index to a level almost 9% below where it started 2020, and is at the lowest levels since late 2015.  These are important variables to be considered in assessing the ability of the global economy to resume a positive outlook going forward.  However, for commodity producing countries though, it is a significant headwind for recovery.

In FX markets, the US dollar remained the pre-eminent safe haven, with the DXY Index remaining roughly flat for the month.  The Japanese yen however was reasonably strong against the USD, while the Euro remains at levels in line with the weakest since mid-2017. EM currencies by and large also remained close to their weakest levels in the year.

In fixed income space, the US 10 year bond yield stayed at the low end of their range around 0.6%, essentially unchanged in the month. EMBI spreads however, drifted down slightly, closing the month at 557 bps having peaked at 661 bps.

Fund strategy

Our overall equity positioning remains in a fairly neutral range, with a slight underweight bias as we are not convinced that the global economy will be able to deliver a V-shaped recovery, and the economic casualties of the crisis will be greater than generally expected.  However, enormous fiscal stimulus, on a global scale, led by the USA, combined with a dramatic and substantial reduction in interest rates, means that a renewed crash-type scenario in equity markets is likely to be avoided.

As such we are cautiously optimistic, but one area where we do have concerns remains around equity valuations.  It is highly unlikely that, despite the fiscal and monetary support, that we will see a short term recovery of corporate earnings to growth rates seen before the crisis.  This points us towards vigilance and patience in our approach.

We have continued with our graduated and differentiated approach to increases in risk, with a prime focus to avoid obvious casualty areas, and to increase risk where either valuations are in our favour combined with greater look-through in terms of earnings prospects, as well as companies that display resilience, both in terms of balance sheet as well as business model.

Fund performance

In line with the recovery in global markets the Multi-Asset Funds delivered positive performance in April, with the Global Growth Fund up 6.7%, but is still down 8.9% for year-to-date.  Should markets recover further, we do believe underlying positions will deliver strong performance.

The more defensively orientated funds, such as the Global Defensive Fund was up 4.3%, while the Sterling Asset Management fund delivered 5.5% in the month.  Whilst we lag benchmarks slightly, our peer-group performance against similar funds remains strong.