The wild ride for so-called risk assets showed no sign of ending in May. Naturally, the strong momentum in price recovery observed in April lost some steam but the direction of travel remained resolutely upwards. As the month progressed, investors displayed an increasing confidence in the global economic recovery with most countries starting to implement lockdown easing measures. Those still vary depending on the stage of progression of Covid-19 in different parts of the world but range from the re-opening of schools to the gradual re-opening of non-essential retail.
The economic data (backward-looking by nature) remains dire with record unemployment, sharp drops in sales and production figures, compensated by large increases in fiscal deficit and government debt levels. On balance, however, market participants have tended to take the view that the combination of extraordinary stimulus measures, both at the monetary and the fiscal level, and the strong desire of consumers and companies to go back to some level of normality warrant equities to be higher. Moreover, the rebound that was, initially, mainly focused on traditional growth and quality sectors such as technology or consumer staples, showed signs of broadening towards the end of the month with laggards such as financials attracting interest. For the financial recovery to be viable, such a sector rotation will be necessary, and we will now be looking at how sustainable the recent moves prove to be.
Despite the above and without wanting to rain on the market’s parade, it is worth remembering that the recovery remains very much hypothetical for the time being. There remains a lot of uncertainty with regards to how damaging the lockdowns will be in the long term. A sustained weak labour market, structural shifts in consumers’ behaviours and pick-ups in corporate defaults are all real risks going forward. And this is only in the optimistic scenario where lockdown easings do not lead to second waves of contaminations, which is by no means guaranteed. Despite strong apparent progress recently on the treatment and vaccine front, there is also no guarantee that a medical solution will be found shortly.
Finally, it is notable that some of the global issues of yesteryear are quickly making their way back towards the top of the agenda. The US-China tensions are on the rise again, probably fuelled by the looming US elections in November and President Trump’s desire to deflect attention away from his handling of the Covid-19 crisis. Those tensions are rapidly spreading to the rest of the world and will continue to have global consequences. Closer to home, the Brexit issue will have to be addressed in the coming weeks too as the end of June deadline to agree an extension to negotiations is approaching. We have learned over the years that deadlines can prove flexible for EU-related matters and that bureaucrats can be surprisingly creative when hitting a deadlock but, whatever the outcome, Brexit will no-doubt start weighing on sentiment again soon. While our fund is exposed to the recovery through selective strategies, we thus continue to believe that some caution is warranted from here.
The TB Wise Multi-Asset Growth fund was up 4% during the month, ahead of the target benchmark CBOE UK All Companies index (+3%) and its peer group, the IA Flexible Investment sector (+3.8%).
The fund’s strongest performers were found in the commodities sector with the Merian Gold & Silver continuing its march higher helped by a re-rating of gold and silver miners, while the Blackrock World Mining and Baker Steel trusts were supported by the prospects of economic recovery. The International Biotechnology trust also had a strong month, being in the sweet spot where technology meets healthcare, two of the clear winners of the Covid-19 crisis. On the negative side, our private equity holdings in ICG Enterprise and Oakley Capital Investment trusts remained volatile as investors struggle to assess the impact of the crisis on their illiquid portfolios.
In terms of portfolio activity, we took some profits in the Merian Gold & Silver fund after a very strong period of performance but continue to have a large allocation as we believe there is more upside to come. We also reduced our allocation in one of our more defensive positions, the Janus Henderson UK Absolute Return fund. Conversely, we took advantage of attractive discounts to top-up our allocation to two of our technology-exposed investment trusts (HG Capital and Herald Investment) which give us exposure to strong growth themes but without the same worrying valuations generally found in the sector. We also continued to increase our allocation to two recent additions (TwentyFour Income and Oakley Capital Investment trusts). Finally, we topped up our position in the Miton Global Infrastructure Income fund which provides us with strong defensive growth opportunities.