Efforts by governments and central banks around the world provided a positive signal to risk over the month. As a result, global equity markets rebounded in April. Notably, the Chinese economy showed initial signs of a recovery from lockdown measures.
Technology stocks largely led the market rally, alongside a strong performance from traditional value-oriented shares, including those with high levels of leverage. The Global Equity Income Portfolio, which does not tend to hold many technology nor highly leveraged companies, returned 6.2%. This lagged the global index return of 10.8%. Though somewhat disappointing on a relative basis, this performance is consistent with expectations for the portfolio’s quality-focused strategy, which saw substantial outperformance during the market sell-off earlier in the year. Year to date the Global Equity Income model has fallen 11% versus the global index decline of 12.8% and a global high dividend index decline of 16.1%.
At a stock-specific level, six companies within the portfolio served up double-digit returns. Strong earnings and updates were seen from AstraZeneca, Johnson & Johnson and Microsoft, the strategy’s top performers over the month. As hoped, AstraZeneca has experienced substantial growth in sales of oncology products as existing approved drugs were approved by the US Food and Drug Administration for use in the treatment of earlier stage, and other, cancers. Johnson & Johnson reported earnings some 15% ahead of expectations, but cautioned that the group’s medical device division may see some negative impact in the next few quarters following the postponement of elective surgeries due to Covid-19. We see this, however, as demand deferral rather than demand destruction. Microsoft’s experience of increased cloud usage by businesses is likely to persist.
During the month, the portfolio’s energy exposures proved a drag on performance, with BP falling 7.5% and Shell 5.2%. In light of the lower oil price, Shell cut its dividend and BP is now anticipated to do the same in the next quarter. We believe OPEC production cuts and shale capacity exiting the market will help spur on a recovery in oil prices, particularly as lockdowns begin to end and demand recovers. The long term for both oil companies is a renewable future. We continue to believe that both are sufficiently well capitalised to weather this period and emerge to ultimately greener pastures.
More broadly, we believe that the second quarter of 2020 will see particularly poor economic data and earnings disappointments across many sectors. In light of the operations and typical balance sheets of some industries and companies, which we do not hold, we expect more turbulence in the wider market.
Our central case continues to be that economies will rebound later in the year following a deep drop. Furthermore, as economies reopen after lockdown, we will see a new normal emerging, one that potentially includes restricted travel zones, increased sanitation requirements, increased testing, government enforcement of localised lockdowns and isolation of the elderly. Many firms are currently working on vaccines, with some of the most promising candidates due to report results within four to five weeks. Success in the clinic will likely result in vaccination programmes being rolled out by year end.
Once there is more certainty regarding the economic outlook, investors are likely to rapidly reassess the prospects for companies. For those with operations relatively unimpacted by the pandemic, and with sufficiently strong balance sheets, investors are likely to look beyond poor short-term results. The world remains awash with liquidity due to the stimulus efforts of central banks. We remain committed to an approach which favours quality companies offering decent dividends and will seize opportunistic entry points should they arise. Over the long term, we believe this provides scope for continued outperformance against a high dividend benchmark.
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