Global Investment Commentary

April 2020

Summary
After the severe shock in March, markets rebounded strongly in April. COVID-19 continued to spread globally, but some countries saw daily new infection rates start to fall and began planning to gradually reopen their economies. Governments and central banks introduced very significant stimulus measures to reduce the damage caused by the economic shutdown, restoring some positive sentiment to markets.

Market round-up
Volatility eased from the extreme levels of the previous month. Developed nations’ stock markets outperformed emerging markets and growth stocks outperformed value.

In local currency terms, the FTSE 100 rose by 3.90% while the S&P 500 returned 12.80%, recovering close to 60% of its prior decline.

The MSCI Europe (ex UK) index rose by 6.55%, while Japan’s Nikkei 225 increased by 6.75% and the MSCI Asia Pacific (ex Japan) registered a positive of 8.21%. China also made substantial inroads in recovering its lost ground, with the SSE 50 up 6.42%.

Fixed income markets rallied overall as central banks committed to purchase more government and corporate bonds. Corporate bonds benefited most while concerns over the climbing US jobless claims figures and the ever-increasing cost of relief packages held back US Treasuries in particular.

Despite April’s market rebound, considerable uncertainty remains about the trajectory of global growth over the coming quarters. Much will depend on the extent to which economies can successfully reopen. For this reason, we expect further volatility and continue to remain prudently positioned.

UK
April finished with the harsh reality that 26,800 people had lost their lives to coronavirus in the UK. The Prime Minister, Boris Johnson, was himself treated in intensive care and, if recent reports are accurate, narrowly avoided becoming the highest-profile victim of the pandemic.

While regular news viewers may have started to feel slightly more upbeat towards the end of the month, with the country entering its sixth week of lockdown it should have been no surprise that economic data for April was negative, to say the least.

The UK Services Purchasing Managers’ Index (PMI) tumbled to 12.3 in April 2020 from 34.5 in the previous month, well below market consensus of 29.0, a preliminary estimate showed. The latest reading pointed to the steepest reduction in service sector activity since the survey began in July 1996, as new orders, backlogs of work and employment all declined at record rates as measures to contain the pandemic impacted on businesses and activity. Hotels, restaurants and other consumer-facing business were the hardest hit, with many firms reporting a total halt in activity.

The Manufacturing PMI followed in the same vein and for the same reasons, falling from 47.8 in March to 32.9 in April. Goods producers overwhelmingly linked lower output to plant shutdowns or reduced production capacity, as well as cancelled orders across manufacturing supply chains. The sharpest drop in output was registered in the textiles and clothing sector, largely reflecting a collapse in demand from retailers.

The transport sector, including car production, has also been hard hit. UK new car registrations tumbled by a record 97.3% from a year earlier to the lowest level since February 1946, just a few months after the end of World War Two. Fleet orders represented by far the bulk of the market, taking 71.5%, equivalent to 3,090 units, while private buyers registered just 871 cars. The distortion was reflected across all segments and fuel types, with the numbers of new petrol and diesel cars joining UK roads down 98.5% and 97.6% respectively, as plug-in hybrid vehicles declined 95.1% and hybrids 99.3%.

Eurozone
In Italy, the initial epicentre of the outbreak in Europe, the number of new cases is finally reducing and a gradual business re-opening will take place. Meanwhile, Germany has already relaxed some restrictions. The eurozone’s real GDP contracted 3.8% in the first quarter of the year and the second quarter is likely to show a steeper decline. The composite April flash PMI indicator for the eurozone fell to an all-time low of 13.5, confirming a substantial hit to businesses. The International Monetary Fund estimates a drop in 2020 GDP of over 7%, with a significant increase in deficits and debt levels.

The European Central Bank (ECB) continued its quantitative easing programme, applying some flexibility by putting an increased emphasis on purchases of government bonds from those countries with the greatest need due to the virus, including Italy and Spain. The ECB also eased collateral requirements
to include high-yield securities in order to support lending to small and medium-sized companies and to businesses whose bonds have been downgraded.

US
Management of the epidemic in the US has inevitably become a political battleground with the election due later this year. According to research, the percentage of people who evaluate the state of the economy as good or excellent fell from a peak of 57% registered at the beginning of the year to only 23%.

The US economy contracted at an annualised pace of 4.8% in the first quarter of the year. Fiscal stimulus measures passed by Congress have been enormous, but more may still be required. The number of jobless claims has increased by 30 million in the last six weeks. How many of these layoffs end up being temporary will be key for the outlook. The extent of the economic deterioration due to the shutdown was evident in the April flash composite PMI, which plunged from 40.9 in March to 27.4 in April. Retail sales also fell 8.4% in March.

The response of the Federal Reserve (the Fed) has been dramatic in both size and speed. The US central bank has committed to unlimited government bond purchases.

It will also now buy investment-grade corporate bonds and high-yield bonds (provided that the issuer had an investment-grade rating prior to 22 March). In addition, the Fed will purchase corporate bond exchange-traded funds (ETFs), including some high-yield ETFs. The action of the central bank contributed to a sharp decline in investment-grade and high-yield spreads, and kept Treasury yields low despite the massive fiscal stimulus being provided.

China
China’s economy has been gradually reopening. First-quarter real GDP declined by 6.8% year on year. However, since March there has been a recovery in production, retail sales and investment. The China Urban Survey unemployment rate fell to 5.9% in March from 6.2% in February.

Despite the pickup in economic activity, it is premature to expect a rebound that rapidly restores output to previous levels. Much will depend on the success of exit strategies globally.

Demand for Chinese goods from Europe and the United States, where social distancing measures are still in place, could remain weak. Moreover, to prevent a second wave of contagion, China may have to maintain social distancing, particularly in areas of the economy such as sports events, cinemas and restaurants, leading to a softer recovery.

The People’s Bank of China increased its monetary stimulus, cutting the one-year targeted medium-term lending facility (TMLF) rate by 20 basis points (bps) to below 3% and the one-year and five-year prime rate loans (PRL) by 20bps and 10bps respectively. Social financing data showed an acceleration in loan issuance, reducing liquidity risks.

With the rebound in April, the year-to-date drop in the CSI 300 index of Shanghai and Shenzen-listed stocks was sharply reduced to -4.5%. This was thanks to the index’s high exposure to domestic consumption sectors and its limited weighting in energy, compared with some other indices. Markets are also optimistic that, while severe, the pandemic will not derail China’s positive structural growth outlook.

Conclusion
Overall, we retain a degree of caution as we expect the recovery from the COVID-19 shutdown to be gradual. However, given the unprecedented policy response, particularly the willingness of central banks to intervene in credit markets, this has marginally shifted the balance of risks.

Without losing sight of the increasing death toll and the rising global economic impact that COVID-19 will have, as the narrative has turned towards a reducing daily infection trend and reports of various countries easing lockdown measures, there is clearly a glimmer of positivity on the horizon. One would expect this shift in sentiment to allow the differing asset classes to start reacting in the manner to which we have historically become accustomed, rather than the indiscriminate negativity that systemic market shocks typically bring. While we should not completely discount the risk of premature easing of movement restrictions bringing a second wave of infections, there are signs that the worst is behind us and that we can start to look forward with an increased degree of optimism.

On this basis, we continue to believe that a sensible allocation to risk assets, such as equities and bonds, is prudent.

Risk Warnings
The following is a summary only of some key items in the Prospectus.
Capital is at risk. Investors in Protected Cell Company (PCC) must have the financial expertise and willingness to accept the risks inherent in this investment.
Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.
The Master funds will be exposed to stock markets. Stock market prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
It should be appreciated that the value of Shares is not guaranteed and may go down as well as up and that investors may not receive, on redemption of their Shares, the amount that they originally invested.
Investment in the Company should only be undertaken as part of a diversified investment portfolio.
Investment in the Shares should be viewed as a medium to long term investment.
Shares may not be redeemed otherwise than on any Dealing Day.
There will not be any secondary market in the shares of the Company.

Regulatory Information
This material is for distribution to professional clients only and should not be distributed to or relied upon by any other persons. The Cells referred to are a cell of Marlborough International Fund PCC Limited (the ‘Company’), a protected cell company incorporated in Guernsey and authorised as a Class B Collective Investment Scheme under the terms of the Protection of Investors (Bailiwick of Guernsey) law, 1987, as amended. Investment may only be made on the basis of the current Prospectus, this can be found on the website www.marlboroughinternational.gg.
Marlborough International Management Limited is incorporated in Guernsey. Registration No. 27895.
Regulated by the Guernsey Financial Services Commission. It is not protected by any investor compensation scheme.
Licensed under The Protection of Investors (Bailiwick of Guernsey) Law 1987. Guernsey Office: Town Mills South, La Rue du Pre, St Peter Port, Guernsey GY1 3HZ. Tel: +44(0)1204 589336.