20th April 2020
Quilter Cheviot: MPS monthly newsletter
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There has been a lot to discuss since the last MPS newsletter on 16 March. To recap some of the more notable news, the UK went into lockdown on 23 March to attempt to slow the spread of Covid-19, with police given powers to fine and arrest those that do not comply with the quarantine measures. The following day a temporary hospital in east London “NHS Nightingale” was announced, and opened within two weeks. In the interim, it was announced that Boris Johnson had tested positive for the virus and by early April he had been hospitalised. At the time of writing, the number of recorded deaths in the UK exceeds 12,000, although government ministers have acknowledged that the eventual figure is likely to be considerably higher than that.
The above developments form only a small part of the shocking daily news reports that would seem more familiar on cinema screens than in our living rooms. Across the world, the number of recorded cases exceeds two million, and whilst some countries have demonstrated success in slowing the infection rate, the virus is yet to take hold in Africa, and is still rapidly spreading through many parts of Europe and America.
The combined fiscal and monetary responses from governments and central banks have been quicker and more significant than in previous global recessions, and so far these measures have been successful in stemming the falls seen at the beginning of March. Financial markets have steadied despite the developments described above – equities staged a bounce toward the end of the quarter which has continued into April, but we are still a long way from a recovery. The Office for Budget Responsibility (OBR) this week warned that the UK economy could shrink by 35% by June if we see a three month lockdown followed by a three month period of partial restrictions. Under that scenario it also predicted UK national debt would temporarily exceed 100% of GDP – for the first time since the Second World War.
Clearly there is a lot that is uncertain at the moment. What we do know is that UK equities are cheaper than their historical average on a price to earnings (PE) basis, and historically, future returns tend to be higher when starting from a low average PE. Surprisingly, despite this year’s sell off, the US is still about in line with its 30 year average PE ratio. We do expect a recovery in due course, but at this juncture we believe it is too early to say that markets have fully priced in the true implications of the crisis.
While investment teams have spent recent weeks working remotely, the level of engagement with managers and companies has continued uninterrupted, with our investment fund and equity research teams working diligently to ensure we have the necessary information to help inform our decisions. Much of this work has led us to conclude that we are comfortable with the composition of the majority of the portfolios as they stand. Some action has been taken within the MPS and IDX Conservative strategies, rebalancing the equity weighting that had drifted downwards, whilst also increasing the credit quality of the strategy’s fixed interest holdings by adding to our gilt position.
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