ii Investment Outlook: Q1 2020

by Lee Wild from interactive investor |

The first quarter of 2020 will go down in history as one of the worst ever for global financial markets.

Market round-up

The first quarter of 2020 will never be forgotten, including as it did the most destructive economic health hazard of modern times. What began as a localised outbreak of coronavirus, quickly became a pandemic that shut down much of the global economy and confined billions of people to their homes.

It will be a long while before we know the exact cost of the health crisis, but US unemployment has soared, and governments worldwide pledged massive fiscal stimulus, while central banks also revealed substantial support packages designed to prop up the global economic system.

The immediate consequences for stock markets were clear, however. London’s FTSE 100 traded not too far off a record high in January, and US indices actually went on to achieve all-time highs in February. The crash that played out over the following four weeks, made worse by a Saudi Arabia-Russia oil price war, was brutal, wiping as much as 30% off the value of some major markets.

And there were other consequences for investors wanting a reliable income stream from equity markets. With high street stores, factories, pubs and leisure facilities closed for an unknown period, UK companies have largely erred on the side of caution, either cancelling promised dividends, suspending payouts, or both, to preserve cash.

Across the asset classes, it was no surprise to see investors seeking safety drive government bonds to top spot, and for commodities, with oil prices plunging and decreased demand for natural resources, to be propping up the table. Bitcoin continues to be the best performing asset class over one, three and five years.

Source: Morningstar Total returns in sterling

Shares 

Risky assets and equities in particular were among the asset classes worst hit by the outbreak of Covid-19. 

In developed markets, the S&P 500 fell 14% in Q1, while the FTSE All Share lost a quarter of its value. Emerging Markets delivered a negative return of -18% for the period, with Brazil and Russia being the main detractors for the performance.

Mid and small-cap stocks underperformed their larger peers.

    Performance  
  Q1 (%) 1 Year 3 Years 5 Years
China* -4.08 -1.02 7.35 7.37
TOPIX Japan -11.22 -2.49 1.20 6.26
S&P 500 -14.10 -2.24 5.40 10.64
Asia Pacific Ex Japan* -15.29 -10.92 -0.14 4.32
World -15.65 -5.83 2.21 7.03
Europe Ex UK* -17.48 -8.28 -1.18 3.07
Emerging Markets* -18.37 -13.50 -1.34 3.29
FTSE 100 -23.84 -18.39 -4.14 0.58
FTSE All Share -25.13 -18.45 -4.24 0.57
India* -26.42 -27.34 -6.38 0.03
FTSE Small Cap -27.94 -19.41 -4.81 1.52
FTSE 250 -30.72 -18.64 -4.70 0.29
Russia* -32.01 -10.03 2.09 10.39
Brazil* -46.83 -38.91 -10.81 1.20
Source: Morningstar *MSCI, Total returns in sterling        

Sectors

Energy was the worst-performing sector in the first quarter, while Utilities, IT and Consumer Staples showed some resilience.

In particular, the dividend cut announcements from Energy and Financial companies further contributed to the negative investor sentiment towards them.

Overall, and as expected, cyclical and economically sensitive stocks underperformed their defensive peers. The only exception was Information Technology, which could be contributed to constituent companies providing work from home solutions, or whose products and services can be consumed and delivered even during these extreme circumstances.

    Performance  
  Q1 (%) 1 Year 3 Years 5 Years
Health Care -5.42 6.02 7.61 8.03
Information Technology -7.23 12.61 15.73 18.81
Consumer Staples -7.38 -0.11 1.79 7.22
Utilities -7.94 0.85 5.03 8.85
Communication Services -11.82 -0.93 -0.04 5.00
Consumer Discretionary -16.62 -7.46 2.75 7.28
Real Estate -18.05 -14.57 -0.66 3.70
Industrials -21.08 -13.30 -1.58 5.54
Materials -21.31 -14.79 -2.83 3.47
Financials -27.15 -17.04 -5.65 2.41
Energy -41.01 -43.50 -16.76 -7.91
Source: Morningstar Total returns in sterling        

Bonds

Government Bonds delivered strong returns of just under 10% in Q1 amid investor worries about the spread of Covid-19. On the other hand, High Yield Bonds behaved almost like equities and delivered -8% total return. Corporate Bonds remained flat.

Central Banks and supranationals pledged to provide substantial liquidity and funds needed for the economy to recover. Interest rates are likely to remain extremely low for the near future.

    Performance  
  Q1 (%) 1 Year 3 Years 5 Years
Global Government 9.59 12.23 4.76 6.84
Global Aggregate 6.49 9.50 3.84 6.40
UK Gilts 6.32 9.94 4.63 4.75
Global Inflation Linked 3.93 6.30 2.92 5.62
UK Inflation Linked 1.76 2.21 2.79 5.89
Global Corporate 0.90 6.23 3.25 6.21
EURO Corporate -2.03 -0.81 1.31 4.81
Sterling Corporate -3.24 1.67 2.23 3.24
Global High Yield -8.23 -3.61 0.60 6.43
Source: Morningstar Total returns in sterling        

Commodities and Alternative investments

Gold was the best-performing Alternative asset class during Q1 as investors piled their money into the "safe heaven" yellow metal. It is now the best-performing alternative over one, three and five-year periods.

Oil and commodities performed terribly as major businesses across the world suspended their operations in the already oversupplied market.

Being cyclical in nature, UK REITs also delivered significant negative returns of -27%. The global pandemic further accelerated the negative sentiment and added to the political risk involved with this sector.

    Performance  
  Q1 (%) 1 Year 3 Years 5 Years
CBOE Market Volatility (VIX) 358.71 310.39 63.43 33.20
Gold 12.57 30.60 9.23 10.25
Cash 0.18 0.74 0.58 0.52
Hedge Funds -10.05 -6.62 -1.56 2.74
Global Infrastructure -24.33 -17.13 -2.97 3.27
UK REITs -27.45 -14.84 -2.98 -2.87
Global Natural Resources -28.29 -26.44 -6.15 0.84
Commodity -29.75 -29.07 -11.38 -6.13
Brent Crude Oil -63.19 -65.06 -24.28 -13.15
Source: Morningstar Total returns in sterling        

ii Super 60 fund selections

The best-performing ii Super 60 fund over the first quarter of 2020 continued to be iShares Physical Gold ETC (LSE:SGLN), returning 12.8% as investors were looking for safe harbours during the market turmoil.

The second-best performing fund was M&G Global Macro Bond which has demonstrated resilience and returned 7.3% for the quarter driven by strong rally in government bonds and long-duration credit. Vanguard UK Government Bond Index and Vanguard Global Bond Index were also up 7.3% and 1.1% respectively as yields declined on the back of an increased risk aversion among investors.

Risky assets and equities in particular were among the hardest hit asset classes during Q1. Worst performing in absolute terms was Henderson Smaller Companies (LSE:HSL) delivering negative return of 34.8% as the sentiment towards smaller companies turned extremely negative.

Amati UK Smaller Companies lost 31.2%. Value strategies also underperformed the wider market.

R&M UK Recovery Fund, Schroder Income and Man GLG delivered -33.9%, -31.7% and -31.2% respectively mainly due to their large exposure to cyclical sectors such as financials.

As at 31st March 2020, 71% of the active portfolios on the Super 60 have delivered above average return against their respective peer group category over five-year period.

The best performing funds over this period were Legg Mason IF Japan Equity, Scottish Mortgage (LSE:SMT) and Fundsmith Equity, all of which have delivered an annualised total return in excess of 15%.

Top five ii Super 60 funds in Q1

  Performance
Investment Q1 (%) 1 Year 3 Years 5 Years
iShares Physical Gold ETC 12.81 30.21 8.97 9.89
M&G Global Macro Bond 7.38 11.41 3.57 6.47
Vanguard UK Government Bond Index 7.37 11.13 5.1 5.08
Vanguard Global Bond Index 1.12 4.92 3.1 2.43
Scottish Mortgage (LSE:SMT) 0.33 13.87 17.39 17.26

Source: Morningstar Total returns in sterling

Bottom five ii Super 60 funds in Q1

  Performance
Investment Q1 (%) 1 Year 3 Years 5 Years
Henderson Smaller Companies (LSE:HSL) -34.83 -20.14 -3.01 3
R&M UK Recovery Fund -33.92 -26.6 -7.93 -0.27
Schroder Income Fund -31.76 -29.81 -7.79 -2.28
TB Amati UK Smaller Companies -31.24 -17.15 1.84 9.64
Man GLG Income -31.22 -24.11 -2.94 1.84

Source: Morningstar Total returns in sterling

Most-traded funds on the ii platform in Q1

Most-bought   Most-sold
Alliance Trust (LSE:ATST)   Scottish Mortgage (LSE:SMT)
Scottish Mortgage (LSE:SMT)   Fundsmith Equity
Fundsmith Equity   Alliance Trust (LSE:ATST)
City of London (LSE:CTY)   Finsbury Growth & Income (LSE:FGT)
Vanguard LifeStrategy 80% Equity   Allianz Technology Trust (LSE:ATT)

Changes to the ii Super 60 list (under review/developments)

No changes were made to the interactive investor Super 60 list of investments during the first quarter of 2020, but there are some issue we believe investors should be aware of:

Merian North American Equity fund

In line with our stated methodology, Merian North American Equity was put under formal review on 25 February 2020 following the announcement that Merian has been acquired by Jupiter and a co-manager of the fund will be leaving the business.

Interactive investor’s selection team has been closely monitoring the situation and speaking to Merian to gain a better understanding of what changes, if any, are likely to take place after the acquisition, that could impact the fund’s team structure, philosophy or process.

The details confirmed with Merian are relatively high level, and we are comfortable that the key fund managers are well committed and incentivised which should encourage team stability and continuity of the investment process under Jupiter’s corporate umbrella. As a result, the fund is no longer under formal review, and it will remain on our Super 60 list.

BMO Commercial Property Trust

UPDATE: The board of BMO Commercial Property Trust (LSE:BCPT) have temporarily suspended the monthly dividend of the property trust. 

Part of their statement from 16 April 2020:

"Notwithstanding the Group's strong balance sheet and its high quality and diversified portfolio, in view of the current uncertainty the impact that Covid-19 will have on future rental receipts, particularly in relation to the Group's retail and leisure tenants, the Board considers it prudent to temporarily suspend its future monthly dividend payments in order to strengthen cash reserves and protect the long-term value of the Group. The Board currently intends to re-introduce distributions when conditions improve and believe that the portfolio is well positioned to begin its recovery once the temporary restrictions surrounding Covid-19 are lifted."

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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