World equity markets plunged 14% in US dollar terms in March (15% for sterling-based investors). Japan was the best performer, down 10% over the month, whereas UK and eurozone markets were down 21% and 20% respectively. Smaller companies were badly hurt by the economic shutdown and peripheral European markets lagged core markets. Energy plunged 35%, followed by financials, down 25%. Given the nature of the crisis, it was unsurprising that health care was the top performer, down 4%, ahead of consumer staples, which fell 8%.
US Treasuries rose strongly as 10-year yields fell 0.48%, reaching historic lows. German and Japanese government bond yields rose as negative-yielding government debt offered little protection against the shock. Inflation-linked debt was hurt as forecast inflation dropped. Credit markets suffered as investment grade debt fell around 7% and high yield dropped around 12% to 13%. Emerging market debt was similarly impacted, with hard currency bonds falling 14% and local markets declining 11%. Despite extreme moves across risk assets, gold finished the month roughly where it started. The US dollar broadly appreciated, despite volatility, while currencies outside of the three majors suffered in a rush for liquidity.
There is little that we can add to statistics in the press about the speed and breadth of spread of COVID-19. The virus is causing a lot of human suffering, whether health-related or in terms of the economic impact on livelihoods. Companies are laying off workers with unprecedented speed, best exemplified by the 10 million new unemployment claims in the US in the final two weeks of March. Business surveys have reached unprecedented lows, implying that upcoming economic growth numbers could be very challenging.
The response from policy makers has been massive. The US Federal Reserve slashed interest rates from 1.5% to zero, while all major central banks moved to ensure market liquidity and purchase debt assets. With many central banks ill-positioned to deal with this type of shutdown, the fiscal response from most governments eclipsed what we saw in response to the Global Financial Crisis. US Congress passed a package worth around $2 trillion dollars, with some money allocated directly to American families. Measures to keep companies afloat included potential lending facilities and equity buy-ins. It remains to be seen whether these measures will be enough.
In midst of the virus-driven slowdown, the failure to agree a production restriction between Saudi Arabia and Russia led the former to move towards full output. This supply glut combined with a demand deficit to send oil prices as low as $20 per barrel. The repercussions were felt throughout both credit and equity markets.
Performance and activity
Over March the fund’s Net Asset Value (NAV) fell 11.0%, the share price fell 27.2%. The Company’s Association of Investment Companies (AIC) Flexible Investment peer group returned -16.9% in share price terms (source: Morningstar). The FTSE World Total Return Index, which the Company aims to outperform over the long-term, returned -10.9% in sterling terms. The Company’s NAV is down 13.0% for the year at end March 2020.
The best performing sector during the period was the commodities sector which contributed 0.3% to performance. The Bank of America Merrill Lynch Commodity Strategy performed well. The strategy was aided by the move of the oil futures curve to steep contango.
All other sectors posted losses for the month. The worst performing sector was Public Equity. The funds position in dividend futures was impacted strongly as equity markets sold off and a number of European companies suspended or cancelled their dividends. The second worst performing position was Sigma Capital Group PLC which detracted 0.7% Sigma Capital Group PLC was impacted as smaller companies sold-off more heavily than their larger counterparts.
Private Equity detracted 3.2% from performance. All of or private equity positions detracted as smaller companies and those more highly leveraged underperformed cash-rich businesses. Our positions in listed private equity holdings were further impacted by widening discounts across most investment trust sectors.
The Property and Hedge Fund sectors were more robust but still detracted 1.0% and 0.6% respectively.
US Treasuries: government debt securities issued by the federal government that have maturities greater than 10 years.
Bond yields: the return an investor realizes on a bond
Investment grade: a rating that signifies a municipal or corporate bond presents a relatively low risk of default.
Net Asset Value (NAV): The total value of a fund’s assets less its liabilities