Monthly Commentary – March 2020

As the Covid-19 pandemic’s human and economic toll became clearer, global equity markets recoiled heavily in March. These dramatic falls sounded the death knell for the long bull market, ending more than a decade of gains since the global financial crisis.

There was some reassurance from China as the month wore on, with data suggesting that the virus had been suppressed there for the time being. But in the Western world, the worst seemed yet to come. As a result, the pandemic will severely dampen the global economy this year.

In an attempt to stave off the worst of the economic damage, politicians and central bankers announced some extraordinary stimulus measures. Among the most dramatic was a $2 trillion fiscal stimulus package in the US. Meanwhile, the Federal Reserve made two emergency rate cuts, taking interest rates close to zero, and pledged unlimited quantitative easing. These measures restored some confidence and helped markets claw back some of their losses.

Oil prices suffered their largest fall since the 1991 Gulf War after a meeting of OPEC+ members, who attempt to support prices by managing supply, ended in discord. Saudi Arabia pledged to ramp up output to squeeze out higher-cost producers. The surplus of oil was exacerbated by Covid19’s dampening effect on global demand.

By region, the best stockmarket returns came from Japan, which had been comparatively unscathed by Covid-19 so far. But as the global outbreak escalated, the Tokyo Olympics, scheduled for this summer, were postponed. Latin America suffered the most severe correction, losing almost a third of its value in sterling terms. This reflected the region’s reliance on global demand.

Defensive sectors – those that tend to be most resilient to downturns – performed best. These included healthcare and consumer staples. The most badly hit were those most exposed to a worsening economy. Energy was the weakest sector, reflecting the dramatic fall in oil prices. Cyclical areas such as financials, real estate and industrials also fell heavily.

At The Scottish, we noted the muted stockmarket reaction to China’s shut down of swathes of its economy in an attempt to stop the virus’s spread. Having felt that many investors were not appreciating the growing risks to the global economy, we made some timely changes to our portfolio ahead of the sell off. In essence, we increased investment in companies with resilient revenues and reduced investments that were more reliant on a supportive economy.

Gilead Sciences was one of the companies we added to our portfolio as we sought investments with the greatest resilience to the challenging economic backdrop. In March, its shares performed as we had hoped, gaining 10% as markets fell. The company is a leader in anti-infective drugs, offering more stable sales irrespective of the economic environment. Its strong balance sheet adds to the security of its business. We believe that the discount on which its shares trade relative to its sector peers is unjustified. Moreover, alongside its capacity to weather difficult markets, we see opportunities for Gilead to build its pipeline of promising medicines.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.