Marcus Today SMA | April 2020 UpdateAfter two months of market turmoil, we finally saw green again. Despite the world remaining in a state of covid-19 lockdown, with hospitality, travel and retail in purgatory, a market recovery was the story of April.
FUND PERFORMANCE MARCUS TODAY GROWTH SMA (MT0001) *Marcus Today/Thompson Reuters | 08/04/2020 | Details correct at time of publication. Past performance is not a reliable indicator of future returns. The Growth SMA rose 10.0% in April, outperforming the 9.02% rise in the benchmark S&P/ASX 300 Accumulation Index by 0.98%. Our decision to move back into the market on March 23rd proved fruitful through April as we outpaced the rising market. Since the market peaked on February 21st, we are down just 0.13% while the market has fallen 22.2%. Outperforming 22.07% over the period and incredibly happy to have protected your hard-earned capital. Last week we made the move into some “recovery stocks”, including dipping our toes into some fairly beaten up names. We are already in the money on most but are aware of the risks and how sensitive they are to a potential COVID-19 relapse. We will not hesitate to reverse our position should we see the need. Along those lines we are making a reasonably significant play in the energy sector, believing that the long term low is in and happy to catch some stocks at unimaginably low prices. In the long term it is going to be the right call assuming we do not get company-specific blow-ups. STO, WPL and WOR are the strongest and that’s where we have gone. For now, we are neutral banks. Happy enough with that. They hit what felt like a significant low after the NAB capital raising. At worst we hope they will stop underperforming and at best start to recover. MARCUS TODAY EQUITY INCOME SMA (MT0002) *Marcus Today/Thompson Reuters | 08/04/2020 | Details correct at time of publication. Past performance is not a reliable indicator of future returns. The Equity Income SMA rose 6.74% in April, slightly below the 7.07% return in the benchmark S&P/ASX 200 INDUSTRIAL (TR) Index. The gross yield on the Equity Income SMA over the last 12 months was 6.39%. As it did in the Growth SMA, our decision to move back into the market on March 23rd proved a good one, capturing majority of the market upside after avoiding a large chunk of the damage on the way down. Since the market peaked on February 21st, we are down 11.49% while the benchmark index has fallen 23.65%. Outperforming by 12.16%. Whilst we are happy to have protected your capital and outperformed by such a margin, heavy weightings in the banks have held us back as they fell hard and are yet to recover in the manner we have seen in the broader market. For now we retain neutral weightings in the banks, seeing that the worst is likely behind them. With a dearth of dividend opportunities in the current market as countless companies cancel or defer their distributions, we have been forced to turn our focus on capital gains. A dollar is a dollar, whether it comes from income, franking or capital. We understand a lower risk profile is required in this portfolio and manage that with hyper-vigilance rather than the traditional income approach which involves buying boring long-term stocks and forgetting about them. In the absence of income, we have to make money. We have added some REITs at the current lows. Some are now yielding above 6% (rare) and if we can lock those higher yields in here and catch a share price recovery rally - which we think will come - then we will have done the right thing. APRIL AT A GLANCE The ALL ORDINARIES INDEX rose 9.53% for the month after having fallen 21.51% in March and 8.56% in February. A steady decline in the daily death tolls in most of the worst hit nations was a big factor in allowing investors to look past the dire economic data, and ponder what the world might look like on the other side of the lockdowns. Assisting the sentiment was the continued fiscal and monetary policy support, an economic reopening push and even some corporate commentary highlighting some signs of stabilisation in the US. Further buoying the bulls was some good news on the virus front, with the Gilead treatment being fast-tracked through the FDA and the Bill Gates Foundation predicting a vaccine in nine months. All that said, there remains concerns about the amount of good news that has been priced in with the speed and magnitude of the bounce from the March 23rd low. The biggest remaining overhang is scepticism about the V-shaped recovery. Especially as countries begin to relax their lockdown laws. Despite queries of the actual likelihood of a V-shaped recovery, markets took the lead and ran with it through April. The extraordinary month saw every major index higher globally, led by the NASDAQ up 15.45%. The S&P 500 and the Dow Jones lagged the tech-heavy NASDAQ, showing the strength of the technology sector in the US, however, still rose 12.68% and 11.08% apiece. Locally all sectors finished the month in the black, although two of the worst-hit sectors painted very different pictures of recovery. Having fallen 29% in March the banking sector did little to get back into the good books, rising just 0.74% in April and severely lagging the market recovery. In the last week of the month we saw NAB raise $3.5bn and pay out a 30c dividend (64% cut), while ANZ declared they would defer their dividend, a move that WBC mirrored in the first week of May. Since their results, the banking sector has shown mild signs of bottoming. Meanwhile the energy sector had another rollercoaster month. Up 24.80% it was, in fact, the best performing sector. This despite the oil price falling 6.24% through the month, and at one stage deep into negative territory thanks to some front-end contract liquidity issues. WHAT HAPPENED TO OIL? The headlines painted a nasty picture for oil prices in April. The problem is that storage options are running out. As the world has stopped, oil producers have not. They have made some cuts to production, but nowhere near enough and the world is running out of places to put it. The headlines are screaming ‘oil at lows not seen since 1999’. Turned negative. It is true. West Texas Intermediate fell as low as -$37.63. No one wants to take physical delivery of their oil. The costs associated with taking delivery means its more economical to sell at a negative price We have seen WTI rebound back to over $20. The sharp price movements through the month were not a reflection of oil supply and demand but the rather amusing concept of oil price speculators doing whatever they could to get rid of their May WTI Futures contracts before their expiry. Usually there is a market for Futures contracts which are rolled into the next month but the global demand situation and the lack of storage capacity destroyed the liquidity and speculators (not producers or industry participants) had to do whatever they could to get rid of their futures contracts. Effectively paying to get rid of oil. The alternative is taking delivery, which raises the rather amusing concept of an oil tanker being dumped at the reception of the offices of a New York Futures traders. The oil price situation is obviously not great (for oil producers – it is great for the economy) and the oil price is getting to a point where OPEC production cuts are immaterial – it simply won’t be worth producing oil – the market will self-regulate as oil producers in the US in particular cut production. The more important price for us is the Brent price and for consumers Tapis (that drives pump prices). How good is 90c a litre finally? If only we could drive.
IN THE MEDIA Ben sat down on the couch with Henry last week to chat about the SMA's recent performance, some lessons he's learned from the corona-crash, what he thinks about the market outlook and three stocks he likes. Check it out below.
Other features of March:
- Despite the reopening optimism, there remain concerns that another wave of infections that could trigger a stop-start cycle. Big businesses seem much more cautious about opening their doors back up.
- Covid-19 unsurprisingly took its toll on Corporate profits as most companies chose to defer or cancel dividends as they released their H1 reports.
- We are seeing the market volatility getting ‘back to normal’ and hope we will be able to focus on stocks not asset allocation for the next decade. But maybe not. This is the VIX volatility index, a gauge of “fear” which reflects the panic, followed by returning sanity. It takes three times as long to build confidence as it does to lose it which is why markets always fall fast and rise slowly. This index could also be called the “Confidence” index. We need it back to ‘normal’ levels (below 20 – it’s now 34) before the mood
- The Australian dollar continued its rise after falling as low as 55.1c. It is the barometer of economic optimism, a lead indicator that the economic recovery theme is now washing through the markets.
- The RBA has put rates on hold until at least the end of 2021 says a survey of 23 economists. They affirmed that position (at least for the time being) in their Statement on Monetary Policy this week. The FOMC and ECB both told us that they will use whatever tools they have available and reassured the markets rather than warned them. Powell suggested more fiscal support could be needed and said deficit concerns should not get in the way of winning the battle.
- A high inflation number is irrelevant – Q1 Inflation up 2.2% YoY in Australia. Irrelevant. It is a historic number and the RBA is not being driven by inflation at the moment. Plus, the next quarterly inflation number will see deflation.
- The number of Australians receiving unemployment benefits rose to 1.3m as of April 24th, from 800k at end-2019, some analysts are now forecasting that the unemployment rate has already hit 10.8%. Some 28% of Australian adults said they received the first one-off $750 support payment. Goldman Sachs sees the jobless rate will hit 19% adjusted for hours worked by mid-year.
- The numbers were worse in the US, where since mid-march 30m have filed initial unemployment claims. The number has peaked however, with just under 4m applying in the last week of April compared to almost 7m in the last week of March.
- The Gold Price continued to see strength, supported by low rates and central banks’ stimulus.
- Switch from survivors to victims – as the market focuses on economic restart the stocks that has served it so well in the disaster, start to get sold off. We have been playing the same game here, buying a list of stocks on recovery sentiment. For instance, fundamentally you wouldn’t buy Qantas, Sydney Airports, Webjet, Flight Centre (and many others) but for a recovery bounce, you would
THE MONTH AHEAD We are fully invested and leveraged to a recovery, although we are not glued to anything and are assessing our position daily. We are hoping to avoid having to ‘time the market’ again, but there are no guarantees. We have a large Macquarie holding so their results on Friday are in our focus this week. We are still acutely aware of the need to protect from another down-leg although, from these levels, it is less likely and if it happens it will be less severe - but it could happen, let’s not stick our heads in the sand and pretend it’s really all over. This is a high-risk moment for the markets - as countries, States and economies open up all it will take is a headline like “CVOID-19 cases in Florida explode again” and it could all come tumbling down. The media would love to sensationalise that headline as well. So, on the watch still – alert not alarmed.