Quarterly Investment Newsletter Spring 2020

Fri 17 Apr 2020

At our Investment Committee meeting in the first week of January we discussed amongst other things the heralded resolution of the trade war between the US and China, the fact that the US Federal Reserve was printing more money, and the renewed optimism that came from a stable government here in the UK. Cautious bullishness on risk assets was the tone of the meeting. Looking back at our discussion documents from that meeting, our ‘Wall of worry’ chart which details the things which we consider to be possibly obstructive to stock market gains, did not even mention coronavirus. In other words, we have experienced a true ‘Black Swan’ event. Global stock markets fell by 20% over the first quarter (around 15% for a Sterling based investor) having lost as much as 32% by mid-March. Gold performed its role as a safe haven rising 12% in Sterling terms, whilst Gilts rose by over 6%.

Little can be written about the coronavirus pandemic which hasn’t already been read or heard before, nor does any of that content contain any meaningful analysis or certain information. At the time of writing data remains sparse and authorities around the world are working to a playbook where each page is written as we go along. But we can reasonably assume that this pandemic will pass, and that communities, countries, economies, and markets will return to something resembling normality. Therein lies the challenge for investment professionals: What sort of ‘normal’ will we get? Given the scale of fiscal and monetary interventions, the disruption to global trade, and the psychological impact on consumers, our view is that the effects of this pandemic could be significant and long lasting.

What then of markets, and how should we react as investors? Forecasting the short term movements of the market is difficult at any time, and at present almost impossible. However, the psychology of investing means that unless we simply want to revert to holding cash forever, the best strategy remains holding tight and waiting for a recovery. Whilst fear abounds it is tempting to try to sell risk assets with an intention to buy them back in the future at a lower price. This approach, however logical it may sound, is unlikely to be successful given that it relies upon a frightened seller becoming a reassured buyer at an even lower price when the news flow has deteriorated further.

At our April meeting the Investment Committee voted to retain our overweight positions in Gold and short term Government and Corporate debt, and no new asset class positions were initiated.

David Baker, CIO