• Technology shares, together with traditional value-orientated stocks, led the global equity market rebound in April, as stimulus measures continued and the Chinese economy began to show signs of recovery
• The Global Leaders Fund (I class USD) returned 8.3% for the month, somewhat behind the global index return of 10.8% and 4.2% ahead of benchmark year to date
• The fund reduced its position in oil major Shell, while the holding in Chinese insurer Ping An was increased.
Global equity markets rebounded in April with measures from governments and central banks to support citizens and companies providing a positive signal to risk. 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 Leaders Fund (I class USD), which in aggregate holds stocks with considerably lower levels of debt than the market, returned 8.3%. This lagged the global index return of 10.8%. This performance is consistent with expectations for the quality-focused strategy, which saw substantial outperformance in the market sell off earlier in the year.
At a stock-specific level, 10 companies within the fund served up double-digit returns. NXP Semiconductor rebounded 20% following a disappointing performance last month. Strong earnings and updates were seen from AstraZeneca, Reckitt Benckiser and Microsoft. These companies are not expected to be notably affected by the Covid-19 lockdowns, and some may even show a positive impact. Increases in cloud usage by businesses and increasing consumption of hygiene and personal care products are likely to persist. By contrast 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.
In contrast to March’s elevated level, April trading was subdued. The timing of March’s top up of Shell, and the stock price’s subsequent rally, left the fund with greater than desired exposure to crude oil. The position in Shell was trimmed prior to results being released, while the holding in Ping An was increased. We continue to believe that the long-term investment case for the Chinese insurer remains positive and that insurance demand in the shorter term should benefit from the pandemic.
During the month, the fund’s energy exposures were 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 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.
Our central case continues to be that economies will rebound following a deep drop. The decision to shut down global economies in an effort to prevent a humanitarian crisis was, in part, due to a lack of available scientific information. The path to reopening these economies is equally unclear, but what is apparent is that extended periods of economic lockdown are themselves creating a humanitarian crisis.
A new normal is likely to feature more nuanced measures which could potentially include 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 and will seize opportunistic entry points should they arise. Over the long term, we believe this provides scope for continued outperformance.