At our investment committee meeting this morning, we decided to again hold our current Guardian investment allocation. Although there was an increase in market values early last week, by Thursday and Friday, market values began falling and continued today. Overall, the trend over the past 50 days has been a slow upward trajectory with volatility much higher than what it has been for the past few years but declining since the end of February and beginning of March.
The chart above shows the daily level of the CBOE VIX Volatility Index over the last year. The VIX is a measure of the volatility of the S&P 500 index and reached a peak of 82.69 on March 16th 2020 but has since fallen and was 37.19 at close on 1st May 2020. The normal level of VIX is below 20.
Given the continuing uncertainty, we are comfortable with being fully invested in the US and international funds as markets start to reopen. We also feel cautious about being fully invested in our Guardian portfolios and are delaying our decision to increase equity exposure until we see a more consistent upward trend. We are continuing to run our technical indicators and are seeking to progressively move back into markets while also being conscious of the slim probability of a further market crash.
In the short term, markets will continue to be unpredictable for as long as there is uncertainty. They will increase with hope and announcements of new scientific advances and as sectors of the economy start to cautiously reopen. They will also decrease when there are larger than expected losses and as governments struggle with the huge economic consequences of economies which have been almost completely shut down for three months, have enormous and sudden unemployment levels, high amounts of debt and continuing social distancing requirements until a vaccine or cure is discovered.
Trade tensions between the US and China have unsettled markets. President Trump has threatened further tariffs or other retaliatory measures in relation to accusations that China’s early reaction to the virus was insufficient and that the pandemic started in a lab in Wuhan. Although the latter claim has not been confirmed by intelligence agencies or scientists, in a re-election fight this can help deflect against President Trump’s unwillingness to take responsibility for the poor and uncoordinated US response. The allegations against China can be a political diversion for the leaders of many countries and comes at a time when there are also concerns about the global manufacturing dependence on China. This may encourage other countries to question their relationship and response to China and could potentially cause further trade tensions.
Reports that the Eurozone faced the sharpest contraction on record in the first quarter of the year after only a few weeks of lockdown, raises concerns that figures for the second quarter of the year will be even more distressing. Preliminary estimates showed an EU GDP contraction of around 3.8%, the worst contraction recorded since records began in 1995. Having already posted declines in the fourth quarter of 2019, both France and Italy were already in a recession from the end of March. The IMF expects EU GDP to fall by 7% this year. The European Central Bank has already lowered interest rates and announced bond buying programmes. It will be the greatest economic contraction and challenge during peacetime.
In the UK, plans to start a cautious reopening will be unveiled as both the numbers of deaths and the rate of increase in new cases continue to fall. Although still incredibly heart-breaking and too large to comprehend, the daily numbers are still too high at this point in time to allow an easing of restrictions. The UK government is working on a plan which they will be announcing within the next week. There may not be a timeline yet, but they are planning to trial the reduction of restrictions in the Isle of Wight first. If successful, this could lead to a blueprint for social easing of restrictions in areas within the UK with smaller case numbers. In the meantime, many sectors of the economy will continue to struggle such as hospitality, airlines, restaurants, hotels, cafes, theatres, cinemas and many more.
Within the next 12-18 months, a vaccine or a drug regime which treats the symptoms of the virus will hopefully emerge. This will allow for a fuller recovery in the economy. This unusual moment has allowed time to pause and reflect on life, and look after family, friends and loved ones. It has created a new sense of community and allowed us to reduce our environmental footprint. Although this has been difficult, heart wrenching, painful, devastating and life changing in many ways, we hope that there continues to be a glimmer of hope for you and a silver lining on the clouds above.
As these portfolios are designed to protect your investment and provide long term growth, we have continued our approach with full equity allocation to US and International funds and a gradual move back to a full equity allocation once further trends are evident. Our early progressively cautious stance has allowed us to continue to be cautious while partaking in the majority of equity markets.
As mentioned last week, we are preparing to make some strategic changes to the asset allocation within our Heritage Range of portfolios and to launch new Heritage Dividend portfolios. We are currently waiting for all of the new investment trusts to be available on the platforms. Once this has been completed, we will be ready to create and rebalance into the new portfolio asset allocations.
The arrangements are continuing to set up Crossing Point on the Standard Life wrap platform. We are hoping to have our portfolios available within the next week.