Summary

• The Ashburton Global Multi-Asset Fund range delivered a positive performance during the second quarter, with the Global Growth Fund rising 2.4%, the Global Defensive Fund up 1.4% and the Sterling Asset Management Fund delivering 1.3%

• The MSCI All Countries Index rose a further 3% in June, bringing the second quarter performance to a positive 11%. Concerns persist, however, that a reduction in COVID-19 fatalities may simply be due to the lag between infection and fatality

• Globally, fiscal and monetary policy remain at full throttle. Markets too are priced for full economic recovery and for a return to the previous economic trajectory. However, the longer it takes for normal activity to resume, the further up the chain the damage will be wrought

• We are moving forward on our decision to diversify fixed income emerging market exposure into China sovereign bonds and will be entering this trade shortly.

Market update

Markets remained in a fairly sanguine mood in June, despite rising COVID-19 cases in the US and across Latin America. It was another positive month, with the MSCI All Countries Index adding 3% in June, bringing the performance for the second quarter to +11%. Caution persists, however, around lower COVID-19 fatality rates, which may not be as positive as it appears on the surface, given the estimated two-to-three-week lag between infection and fatality.
 
However, on a global basis, fiscal and monetary policy remain at full throttle. This is certainly, in a world of low overall bond yields, pushing investors to look through the economic slowdown towards recovery. Markets are, therefore, priced for full economic recovery and for a return to the previous economic trajectory. What this means is that markets in general will likely be enormously sensitive to global or local shocks and avoiding the fallout from these potential headwinds will be key to generating a positive performance in the period ahead.

It cannot be disputed that there will be lasting and even structural damage to a number of sectors and that we are likely entering the ‘insolvency stage’ of the recovery. The longer it takes for normal activity to resume, the further up the chain the damage will be wrought. Mega cap stock performance in the tech sector has shown that the market also considers these growth stocks to be defensive, as they have strong balance sheets and resilient business models. Smaller stocks are unlikely to be able to replicate such resilience.

The impact of quantitative easing programmes is self-evident in bond market moves, or rather, the lack of movement. US 10-year bond yields have largely flat-lined over the past quarter, hovering around 0.65%. This despite equity markets pricing in a full economic and earnings recovery. At some point pressure for yields to normalise will feed through and, at such low yields, their defensive nature can be questioned.

It has become apparent that Asia has mostly managed the pandemic fairly well. Together with China’s substantial fiscal support, Asian markets are likely to continue being extremely well supported. However, one note of caution as the US elections draw near are the geopolitical tensions which are likely to feature strongly in risk appetites.

This leads us to the US dollar, which has featured strongly over the past year, and more recently as the global safe haven. With investors pushed into risk-seeking mode by central bank actions, there might well be a rotation away from US assets at some point into cheaper assets. This could well prove US dollar negative. At the same time, fears about monetisation of fiscal stimulus may lead some investors to worry about inflation. All told, this is likely to support gold prices.

In light of the recovery today, and with US elections likely to dominate the scene for a number of months, we expect the second half of 2020 to be somewhat more muted. Although with the backdrop of sustained liquidity downside moves may be seen as buying signals.

Fund strategy

We retained a fairly neutral to slightly underweight overall equity position. This, we feel, best reflects a balance between the competing debates around overdone valuations in some areas, (a concern about too quick a recovery in markets) and the cautious optimism based on nascent economic recovery and enormous amounts of fiscal and monetary policy stimulus.

We opted to shift our gold exposure closer to physical gold where possible, cognisant of how far gold producer equities have run. We made the decision to diversify our fixed income emerging market exposure into China sovereign bonds but have held back on execution. Although, given the most recent moves, we will be entering this trade shortly.

Given the uncertainty around the ability of many emerging markets to respond appropriately to the healthcare and fiscal demands of the COVID-19 pandemic, we will continue to avoid increasing overall exposure into emerging markets. Instead, our focus will remain the more economically resilient Asian emerging markets.

Fund performance

Our Global Multi-Asset Fund range delivered a positive performance during the second quarter, with the Global Growth Fund up 2.4% and delivering a solid 11% for the period. Fixed income positions did not add much in terms of performance as developed market bond yields remained flat to slightly higher.

The Global Defensive Fund was up 1.4%, while the Sterling Asset Management Fund delivered 1.3%.