The Multi-Asset Process

April 2020 Market Review

Just when people thought the word unprecedented may be worn out, a spell of negative crude oil prices (at least technically) marked another first in a long April under lockdown conditions.

After the extreme volatility of March, markets have settled to some extent with the FTSE 100, our News at Ten Index, steadily rising through the month to climb back beyond the 6000 level. As we saw amid much of the retrospectively halcyon ­­days of worrying about Brexit and trade, equities seem to have developed the ability to disconnect from bad economic news over any time period beyond a few days.

As bizarre as it might sound given the state of the world, the S&P 500 registered its best month since 1987 in April and has already regained around half the losses suffered in one of the fastest moves into bear market territory in history.

This short-term resurgence appears to show markets satisfied with the response of central banks and governments and pricing in, if not a V-shaped recovery, then at least a U. But with so much uncertainty still around, we would warn against looking too far ahead: we have had bounces amid previous bear markets and could certainly see further down legs over the months to come, especially if there are renewed waves of infection after lockdowns are eased.

If we look at those previous downturns, all we can say with certainty is that there will, ultimately, be a recovery but predicting the duration or shape has rarely been a profitable endeavour. To bring back that word again, we are in unprecedented territory in so many aspects of life at present so perhaps the recovery will prove similarly unprecedented: a Nike swoosh is among the latest novel suggestions, which is a staggered upturn where different parts of the economy come back quicker than others.

Of course, the great unknown remains how countries around the world will implement exit strategies and bring their economies out of deep freeze. We have seen China begin to restart and some of the other worst-hit countries ease quarantine measures but this will be a lengthy road and anyone predicting an instantaneous snapback is likely to be disappointed.

As might be expected from his track record, caution is not in the lexicon of President Trump and with re-election in his sights, he clearly wants the US economy firing again as soon as possible. History shows second terms are far harder to win during periods of recession and high unemployment, and suggestions about injecting disinfectant – whether tongue in cheek or not – show a leader increasingly short of time.

As we look to the next few months, we are clearly facing a very difficult second quarter: consensus suggests we will see the biggest year-on-year economic slowdown on record, with estimates ranging from 20% to 30% of global GDP lost. These are frightening numbers but combined fiscal and monetary support is already materially higher. With thanks to our Liontrust Global Fixed Income team for the data, the current estimate of the global monetary response is a conservative $5 trillion (technically, the capacity is infinite), with a similarly conservative $5 trillion estimate of fiscal support, with more to come when the European Central Bank can find common ground. IMF calculations actually put combined fiscal stimulus packages in the region of $8 trillion.

Without going into a lengthy explainer on futures, at one point during April, crude was trading in deeply negative territory on the futures markets, meaning the owners of these were, theoretically, being paid to own barrels of oil. As we all know, oil has slumped because of the impact of Covid-19 on the global economy, with the massive drop in demand resulting in a surplus – with storage overwhelmed – and therefore falls in prices. This slump was only delayed by the recent spat over production between Russia and Saudi Arabia and we continue to watch with interest as the situation develops: could it radically redefine entrenched energy relationships on a global scale?

Another economic factor to consider is rising inflation: given the sheer scale of government intervention during the crisis, concerns are understandable, although talk of a spike seems premature. If we go back to a previous period of government largesse, in the wake of the Global Financial Crisis, there were similar worries that quantitative easing would spark inflation but, ultimately, the forces of globalisation and technology were enough to keep it in check.

This time, however, we would suggest technology is more embedded than it was then, and perhaps less disruptive, and we might also see companies eschew global supply chains and seek more local suppliers in a post-Covid world, both of which could put pressure on inflation longer term. We may also see a shorter-term rise, with income – and therefore demand for goods – remaining relatively steady through the furlough scheme but supply dropping off as factories and other businesses shut down. In terms of preparing for higher inflation, we would expect real assets such as gold and index-linked bonds to offer a hedge and have exposure to these throughout the cycle. If we do see a rise in inflation, we can tilt towards those as necessary.

As we have said over recent weeks, we are looking to move our portfolios to take on more risk (within our risk parameters). Having been neutral since 2018, a three on our one to five scale, we are now moving towards a five. Given the recent bounce, however, we are staying patient while we work out where we are in the cycle: as the recovery from the 2008 crisis showed us, markets often provide a few chances to put money in and attempting to call a definitive bottom is never easy.


With these caveats in place, we continue to favour parts of the equity market that have lagged, so that means Europe, Japan, Asia and emerging markets.

In terms of activity, we remain in close contact with our underlying fund managers and, as we have said before, are comfortable that our selections maintain the processes that attracted us. Many of our managers continue to analyse their holdings, weeding out stocks they expect to struggle over the months and years ahead and adding to names they feel will thrive and, in many cases, this is leading to more concentrated portfolios.

As fund selectors, we often gravitate towards managers who echo our own philosophies and one of the most important for us is the ability to be patient and control your emotions. If anyone needed reminding, the last few months in markets and in much of our daily lives as well have shown that fear and greed are very rarely positive emotions.

We hosted a live webinar with Rory Powe in April, looking to show the type of managers we favour and how we interact with those in our portfolios on an ongoing basis. Rory, who runs the Man GLG Continental European Growth Fund, is among the more recent additions to some of our portfolios, introduced in 2019, but he is a manager I have known since the late 1990s.

As investors will know, at the most basic level, we tend to split managers into growth or value and he has remained a consistent advocate of the former for much of his three decades in the market. But while a long-term investor in technology, for example, Rory is focused on the length of future growth for a company rather than demanding spectacular numbers year on year. He defines his process as seeking strength, whether in terms of sales growth, profits, cashflows or balance sheet and with just 28 holdings and a constantly rising bar in terms of quality, the fund clearly ticks our box in terms of conviction.

To quote Warren Buffett, ‘the best new investment idea is often to buy more of what you already own’ and many of our managers are willing to go through the current short-term pain threshold in order to add to their highest conviction names, which include SAP and L’Oreal in Rory’s portfolio.


From a performance perspective, the Man GLG fund was down around 8% over the first quarter of 2020 versus an 18% fall from the MSCI Europe ex-UK Index. And after all the noise from the passive industry in recent years which has understandably gone quiet this would seem a fairly clear reminder of the benefits of long-term active investment.

For a comprehensive list of common financial words and terms, see our glossary here.


Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Wednesday, May 6, 2020, 11:04 AM