April delivered a major rally in equity markets around the world after the turmoil of March. Investment sentiment was lifted by early-stage easing of the lockdowns in parts of Europe and no major signs of a second wave in Asia. Re-balancing activities by investors switching back into equities from bonds after the earlier slump also provided support to share prices, as did ongoing communications from central banks expressing determination to boost market liquidity and support an economic recovery. A resumption in hostile language between the US and China was, however, less welcome, as were huge increases in unemployment claims and in the numbers of furloughed workers in the developed world.
Share prices of smaller companies performed well in most markets, with UK stocks recouping the most ground. Japanese stocks, which had outperformed in March, lagged this time. The net asset value (NAV) just failed to keep up with the benchmark over the month, but the Company’s shares rose much more strongly, with the discount narrowing from the very extended level that it had reached in the sell-off at the end of March. The Company has been actively buying its own shares through the month.
We continued to reassess the outlook for our portfolio as far as is possible, given the uncertainties pertaining to the current situation. It is becoming clearer now which companies are proving resilient or badly impacted, and we have made some changes to the portfolio as a result. We have added to some of the more defensive stocks, given the prognosis for a sharp global recession, but we have also supported capital raises from several companies that have needed additional funds where we believe in the medium-term recovery potential. Importantly, we have also taken advantage of the weakness in the share prices of some companies which we had previously felt were too richly valued, to take new holdings.
In terms of the regional performance, the UK portfolio enjoyed a strong month, with a number of companies dependent on the housing and construction markets (including Countryside Properties and Breedon) bouncing back on signs that activity in the industry would pick up faster than other parts of the economy. There were many other strong risers, but transport operator Go Ahead Group, specialist foams supplier Zotefoams and casino equipment supplier Quixant, all saw particularly significant rallies in their share prices. Some of the winners from March, including games company Team 17 Group and legal services business Knights Group, lagged the market rally, with more cyclical companies and sectors tending to do best, having sold off sharply in March.
In the US, our holdings in Wheaton Precious Metals and SSR Mining continued to perform well as the gold price rose to new highs. Shares in technology companies tended to be in favour and our holding in Cerence rose strongly. Meanwhile, in healthcare, Catalent was strong as investors hoped that the company could benefit from more drug research work being undertaken. Kirby, exposed to the energy market as a transport operator, rallied after a very weak first quarter set of results. In terms of the weaker performers in the US, The Andersons fell as ethanol margins weakened further and the company’s railroad business suffered from falling volumes. Other laggards included previously resilient holdings, such as STERIS (which may be impacted by less surgical work in the near term ) and Brown and Brown the insurance broker.
The European portfolio did well in April, beating the local small-cap index. Winners included DiaSorin, which has received approval for a coronavirus test in the US; Gerresheimer, the pharmaceutical packaging business, which announced solid results and appears to be coming through the crisis in good shape; and chemicals distributor IMCD, which continued to do well in early 2020. Just Eat Takeaway’s shares were also strong, as the takeaway market started to open up again and customers sought an alternative to supermarket food. A profit warning from combi-steamer ovens supplier Rational AG sent the company’s shares lower, as the restaurant trade was under significant pressure. Ticketing business CTS Eventim fell further, as there appears to be no likelihood of a resumption of concerts and events in the near term. Italian food distributor Marr was out of favour as the country’s lockdown continued to be in force, but this hopefully will see something of a recovery as restaurants and bars gradually open up again.
Our Japanese fund holdings produced mixed results in April, with the Baillie Gifford managed fund doing very well, lifted by the strength of the technology and health care sectors, while Eastspring’s value-orientated approach lagged once again. In Asia, our HSBC managed small-cap portfolio did well, but the Utilico Emerging Markets fund had a poor month, as weakness in Brazilian stocks took their toll on NAV performance. Brazil’s President sacked a number of key members of his administration amid controversy over the way the coronavirus crisis is being handled.
The outlook for corporate earnings remains poor in the near term and further volatility is to be expected as we move through the next phase of the crisis. We will continue to review the portfolio and are closely following developments and corporate news-flow to inform our positioning.
As at 30 April 2020