Stanhope Capital Fortnightly Bulletin – Period ending 15 March 2020

Tactical Positioning

As of today, most equity markets are down over 30% from their peaks on the back of the economic impact of COVID-19, with some areas performing even worse. For example, European equities have fallen by more than 35% and energy equities by around 50%.

Although it is painful to see last year’s gains wiped out by the market fall, the portfolios we manage have nevertheless generally fallen by less than benchmarks. The bias in portfolios to large, quality, growth style companies has been beneficial at a time when value style companies, banks, energy and smaller companies have been particularly hit. In addition, we have more exposure to US equities than to equities of other countries and US equities have outperformed other markets during the setback.

2020 will be a bad year for economies and corporate profits. By contrast, we expect a sharp recovery in 2021, as the impact of the virus dissipates, and the monetary and fiscal stimuli support an economic recovery. As a result, although market volatility is likely to remain high in the short term, we will continue to take advantage of setbacks to add to equity exposure.

Market Moves

Equities suffered a week of historic losses, as worries deepened about the impact of the coronavirus outbreak and Saudi Arabia surprisingly triggered an oil price war. The collapse of talks with production rival Russia, which refused to support an OPEC-proposed cut in global output, led to Saudi Arabia threatening to increase production, sending prices lower. Although the trigger was related to Russian production, the immediate effects will be felt by the North American shale industry. High levels of leverage combined with a sharp downward price shock are likely to lead to bankruptcies rippling through this sector during the months ahead.

The on-going spread of COVID-19 has dominated news headlines and led to extraordinary volatility across asset classes, as markets succumb to the impact of supply chain disruptions and the fall in demand on economic growth. The fall in equity prices is one of the sharpest and quickest corrections we have seen since 1987. In response, monetary authorities have lowered interest rates and injected massive quantities of additional liquidity into the financial system, whilst governments have launched substantial fiscal stimulus programs. Even Germany, secretly admired by some of its peers for the country’s ‘Black zero’ fiscal policy, has committed to provide much-needed relief to mitigate the effects of the health crisis.

A positive note for investors is the latest news coming out of China and South Korea, where the drastic containment and support measures have seemingly quashed the trajectory of the outbreak, with only a very low number of new daily infections currently being recorded. Europe has now become the epicentre of the virus, with fears that the US could see a large, uncontained outbreak next. Several draconian measures have already been implemented by President Trump, most notably a disruptive travel ban between the US and Europe.

Other asset classes besides equities and oil have been highly affected. Government bond yields have continued to fall (i.e. prices are rising) with the Federal Reserve implementing an emergency 100bps rate cut, the first since 2008, taking rates to almost zero. US Treasuries were especially volatile, with the yield on the 10-year decreasing to below 0.35%, before rising as investors started to sell Treasuries towards the end of the week, even as equities and other risk asset classes kept plummeting. By Friday, the US 10-year yield was up to 0.99%.

Economic Updates

This morning, Chinese retail sales data was much worse than forecast, with retail sales down 20.5% so far this year. This is the first time that the year-to-date number has ever shown a decrease since this index started in 1989. As factories and shops continue to re-open, we should see a sharp recovery in sales. However, in Europe and the US, we expect bad economic data over the coming weeks, as the impact of measures to reduce the spread of the disease hit demand. Data should then improve by mid to late Summer.

In the UK, the newly appointed Chancellor of the Exchequer, Rishi Sunak, presented the government’s 2020 budget. Aside from providing additional measures to reduce the economic impact of the virus, the Chancellor announced that he will reduce the extent of  entrepreneur’s relief, introduce a 2% stamp duty land tax for non-UK residents buying property and introduce additional measures aimed at combatting tax avoidance, evasion and non-compliance.

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