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Despite a little weakness in the markets today, May has been another positive month for investors as the gradual release from lockdown has increased the “glass half full” feeling in the marketplace. It is said that equity markets look about six months ahead, so a recovery from the mid-March lows was very much hoped for. The next phase of the recovery depends on the success of global policymakers, but also on how well we all cope with being “let out” from our homes. Even though we are being encouraged to return to a semblance of “normal”, do we really want to go shopping on the high street and start buying cars and other high-ticket goods?
It is interesting that we have had a rotation in markets with ‘re-opening’ stocks taking over from ‘stay at home’ stocks, with value and cyclical stocks outperforming tech stocks and the wider growth sector. The view implied by equity market levels points to a recession that will be over soon, an assumption that we will not see a ‘second wave’ of the pandemic and that a vaccine is on the way. Bad news in either of these areas could cause issues for investors.
In terms of the pandemic and the economic reopening, we have seen a continued easing of restrictions across western Europe, with a lot of comfort being taken from the paring back of lockdowns not being accompanied by a significant increase in the number of new cases. There are clearly some issues further afield such as some states in the US where restrictions have been eased arguably too soon, while the situation in certain countries, particularly Brazil and Russia continue to deteriorate. While the science still suggests that hopes over a vaccine before the end of the year may be too optimistic, markets are still jumping on any hints around any potential medical breakthrough. In the UK, restrictions are set to ease further, with schools partially opening next week, the start of a formal test and trace system (despite the app not working) and the announcement earlier this week that non-essential retail will be allowed to open from the middle of the month. The Government has spent most of the week trying to move the news agenda on from the controversy over Dominic Cummings, the chief adviser to the Prime Minister, whose interpretation of the “stay home, save lives” Government messaging appears to have been somewhat different from the rest of the country. Several clients have asked for more details on the main contributors to their portfolio’s recovery over the last two months. For our advisory clients, the answer is mainly in well chosen active managers staying invested and topping up their favoured stocks at market lows. The discretionary team at Chetwood Investment Management have added further value to our clients by focussing portfolios on information technology, healthcare and low volatility stocks at the height of the pandemic, with more recent fund switches starting to focus on global recovery stocks and global credit (company bonds) that benefit from support from the main central banks. They have also been rotating from defensive consumer staples into smaller company opportunities. The portfolios have made full use of their discretionary powers, moving from a 10% underweight to equities two months ago, to a very slight overweight today. We are mindful that more good news is required to sustain the current recovery in markets, so we will remain patient and fully alert to opportunities, either for additional growth opportunities, or to become a little more defensive should sentiment move back to the glass being “half empty”.
For now then, we wish you all the very best. With the additional easing in restrictions from Monday, we very much hope that when safe to do so, we will be able to start visiting our clients once again. Enjoy this glorious weather and stay safe and well.