July 2020 Newsletter
We have been in touch with most of you during lockdown and hope that this has provided you with some reassurance about your investments. As lockdown begins to relax and with the holiday month of August nearly upon us, we thought a review of our holdings might be worthwhile.
It has been a particularly difficult time for those of you relying on dividend income. The fact that up to 50% of all dividend paying companies listed in the UK will have cut, suspended or deferred dividend payments this year, highlights the challenge. (Royal Dutch Shell cut their dividend for the first time since 1945.)
Our infrastructure and renewable energy funds Ecofin Global Utilities and Infrastructure Trust, HICL and GCP have faced only small cuts to their pay-outs, and corporate bond funds Invesco Enhanced, Baillie Gifford Strategic, and Royal London Extra Yield have maintained theirs. Our Commercial Property Trusts, Picton and Standard Life Property Income, announced reductions to their dividends early, and given the uncertainty surrounding the commercial property sector, we have recommended reducing exposure to this area of the market.
There has been a marked contrast in the performance of the UK market against other global markets especially the US. On the whole, we have had more exposure to global equities than the UK but our UK recommendations have none the less been hit hard. Aberforth Split Income, Royal London UK Equity Income and Independent Investment Trust, are still way below where they were at the start of 2020, as to a lesser extent is the holding of Finsbury Growth & Income. We have stuck with these investments and having suffered the pain, we believe that it would be wrong to sell these holdings now. All these funds have high exposures to UK mid and small cap companies which have suffered the full force of negative market sentiment since the pandemic started; indeed, they have been pretty unloved since the Brexit vote in 2016. One can imagine how construction companies, building suppliers, transport companies as well as pubs, restaurants and travel companies have been hit. However, over the crisis, those companies that survive, often market leaders in their industries, have raised money to strengthen their balance sheets, cut dividends to preserve cash, reduced headcount and generally cut costs. They are now in a position, as we break lockdown and revenues return, where we should see their earnings significantly boosted. Typically, in a classic cyclical stock market bounce, this is the area of the market that usually recovers strongest after a recession.
By contrast, our Global Equity holdings of Scottish Mortgage, Fundsmith, Mid Wynd, Herald and Worldwide Healthcare have all performed well and are all up year to date, some quite considerably. Healthcare has been an obvious beneficiary of the pandemic and to a lesser extent those consumer staple companies supplying us with food and essential household products. The real revolution however has occurred in the technology sector where the digitisation of commerce has taken a sudden great leap forward. Tobi Lutke, the Founder and CEO of Shopify, the e-commerce platform, described it in a recent interview as ‘2030 come 10 years early’. We believe that this sector will continue to revolutionise almost every aspect of our lives, a trend that was happening before Coronavirus struck, but which because of it, has been massively accelerated.
Technology has also been a strong driver of performance in our two Asia Pacific holdings of Schroder Asian Total Return and Pacific Horizon. China and ASEAN countries are far ahead of the developed world in terms of digital adoption, and have their own local technology champions; Alibaba, Tencent, JD.com and SEA Ltd to name a few. These companies mirror the likes of Amazon, Facebook and Google, but have the vast Chinese and ASEAN growing middle class to serve, without the competition from their US rivals.
There are, however, concerns for the future about the sheer cost of shutting down the global economy: the debt taken on by Governments and the amount of money that Central Banks have been printing. To give you some idea of the scale of this, the amount of debt taken on by governments is five times what was needed the 2008 Great Financial Crisis. It is likely that broad money supply will exceed 10% this year and with it an increase in what economists refer to as the ‘velocity’ of money.
Combined with a retreat of globalisation, increased re-shoring, protectionist policies such as tariffs and yes Brexit, such money growth could change the disinflationary environment of the last forty years into a world where inflation returns. The last period of inflation 1966-1982 was a poor period for equities in general and conventional bonds in particular. Our diversified holdings of Capital Gearing and Personal Assets, have positioned their portfolios with the expectation of a return of inflation, with portfolios populated by index-linked government bonds, gold bullion and bullet proof equities. The good news is that inflation is not currently priced into markets and inflation protection is cheap. We are currently suggesting that clients increase weightings to the above two holdings as well as holding some Gold bullion via the WisdomTree Gold Bullion Securities, a physically backed gold bullion Exchange Traded Fund( ETF). Gold has been a proven store of value of the last thousand years, and could prove a valuable protector of purchasing power, should inflation return and fiat currencies debase.
If you would like to discuss your portfolio in more detail, or if you have a need to raise funds please do get in touch and we can arrange either a Zoom or telephone call to discuss. We hope that we can soon invite you back in person to the office but await further instructions from the powers that be.