After its sharp fall in March, the UK equity market recovered some ground in April with a total return of 4.9%, as measured by the FTSE All Share Index. The FTSE 250 Index of medium-sized companies, which had suffered more in March’s sell-off, outperformed with a return of 9.2% compared with a return of 3.9% for the FTSE 100 Index of the largest companies. Although the UK and other economies were experiencing a severe economic contraction, the market responded well to the monetary and fiscal stimulus from central banks and governments and signs that the spread of the Covid-19 virus was levelling off.
A feature of the market has been the number of companies that have cut, cancelled or omitted their dividends. At the end of March, the banks cancelled their dividends at the request of their regulator. The banks sector was a notably underperforming sector in April. Exposure to the banks was reduced in City of London’s portfolio although positions in the sector has been retained for eventual recovery. The oil and gas sector also underperformed with the oil price weak given lack of demand for oil globally. At the end of April, Royal Dutch Shell cut its dividend for the first time since the Second World War. Given the resulting much lower dividend yield for Royal Dutch Shell, City of London’s holding has been reduced. One area for reinvestment was the insurance sector. A new holding was bought in Legal & General, a leading UK life and asset management company. Additions were made to City of London’s stake in Munich Re, the German listed global reinsurer. Both Legal & General and Munich Re increased their dividends.
The extent to which the Covid-19 virus is contained and economies can emerge from lock down is likely to determine the direction of the stock market. As economies recover, there is, in our view, significant potential for corporate profits and dividends to grow again.
All data is Datastream at 30/4/20
Monetary policy: the central bank of a country purchases a large number of financial assets, such as bonds, from commercial banks and other financial institutions.
Fiscal stimulus: the use of government spending and tax policies to influence economic conditions