Global Equity Income Portfolio - April 2020

Summary

  • The actions of governments to reduce the humanitarian impact of the very rapid spread of Coronavirus is leading to a huge, though likely temporary, reduction in economic activity. During March this led to a major risk off environment and very substantial falls in equity markets. The prices of consumer staples and healthcare stocks held up relatively better than the market.
  • A barrage of supportive measures by central banks and governments has been made in order to try and cushion companies and consumers from a deep, but hopefully short-lived, recession.
  • The Ashburton Global Equity Income Portfolios declined 8.3% during March in comparison to the Global Index decline of 13.5% and the global equity high dividend index decline of 16.0%.

Market update

The very rapid spread of the Coronavirus declared a pandemic on 11 March 11 by the World Health Organisation, is resulting in human tragedy across the world. Our thoughts are with all those impacted by the loss of family and friends. The team has relatives in some of the highest risk categories and naturally this causes our families much concern. We do, however, take some comfort in the relatively low risk the virus poses to most of the world’s population in comparison to other major diseases.

Efforts to control the spread of the virus are resulting in substantial reductions in economic growth. A deep recession is now unavoidable. United States (US) jobless claims have spiked to ten-fold the peak of the financial crisis. Certain sectors have been much more heavily impacted than others. Reductions in international travel for instance have serious repercussions on the airline, travel, leisure and hospitality industries. The Ashburton Global Equity Income Portfolios do not have exposure to these areas.

The oil sector too has been impacted significantly. Under normal circumstances aviation fuel accounts for roughly six percent of daily usage, and reductions in economic activity have led to a demand shock. Literally adding fuel to this fire, a major disagreement between OPEC and Russia over proposed supply cuts saw oil prices plunge further, before bottoming below $20/bbl.  Whilst this will be particularly negative for energy companies, as well as oil exporting countries, it will provide some of the ingredients for economic recovery going forward, especially if prices remain below $25 for a number of months.  The MSCI World Energy Sector Index is down over 45% year to date.  There are several reasons to expect the low oil price to reverse. These include a recovery in demand, higher cost production permanently leaving the market, and major oil producers coming to agreements on production cuts given that lower prices are bad for budgets of oil producing countries.

Having begun the month with elevated cash levels top ups were made of several holdings. A new 2% position was also established in Lloyds Banking Group, the UK domestic bank. Trading around half of book value the company looked to offer an attractive yield. Disappointingly on the final day of the month, while noting that the bank had passed stress tests with flying colours, the regulator requested that United Kingdom banks not pay dividends in 2020 “as a precautionary step given the unique role that banks need to play in supporting the wider economy”. We believe that the circumstances of missed dividends from the banking sector this year are understandable. The comparative global equity high dividend index contains very high weightings to energy and banks. The poor performances of these sectors during the month accounts for much of the considerable relative outperformance seen by the Ashburton Global Equity Income strategy during the month.

Many businesses will not cope with a period of such severe economic reduction. Governments and central banks have unleashed a barrage of measures to help support society and businesses. While monetary policy stimulus will do little to ease consumers’ plight, fiscal stimulus to provide support for individuals as well as corporates is also on its way, with the US Congress approving a fiscal stimulus of over $2 trillion, representing almost 10% of gross domestic product (GDP). We seek to avoid investing in businesses reliant on support and potentially in need of future non-expansionary capital. While the economic valley is deep our central case is for the economy to improve fairly rapidly after isolation efforts end. Getting back to normality may be enabled by the roll out of antibody testing and the knowledge of those not at risk of coronavirus infection due to immunity.

Many dark clouds have silver linings. Times of adversity can be wonderful for innovation. Pollution levels have plummeted. Businesses and home working policies will find efficiencies. For long term investors they also provide opportunities to buy shares of companies at much reduced prices. Our team has conducted deep reviews of the impacts of the virus on the underlying operations of each of our holdings and how their business will be positioned once the recovery begins. Inevitably the greatest share price gains will eventually come from some of the most highly leveraged more dicey businesses, while peers of these sorts of companies may fail. Our philosophy is to avoid opportunities for permanent capital loss and rather invest in shares of well capitalised companies that compound their intrinsic value over time.