A more difficult month, to say the least, after the mixed start to the year that we saw in markets in January. So equity markets in the UK and around the world saw further negative returns, with the FTSE All Share, which I use as a benchmark for the Compound income Portfolio, providing a negative total return of 8.9% which leaves it negative by 11.9% YTD too. This came as markets suddenly seemed to get spooked about the potential negative effects from the spread of Corona virus having been fairly relaxed prior to that.
Compound Income Portfolio
Against this on going negative sentiment in the market it was unsurprising that the CI Portfolio saw negative returns too, albeit that the -6.7% was less than the -8.9% from FTSE All Share in February. This leaves the portfolio down by 6% YTD (having been up in January) versus the 11.9% negative return from the broader market. So at least some decent out performance in the bank should things get more difficult as the year progresses, not that you can spend relative performance! If you would like to see the full performance history please click here to view.
With this months screening there were a couple of stocks which came up as natural sales based on their deteriorating Scores & I did decide to top slice Avon Rubber (AVON) this month as the position size approached 10% as it held up well in the market carnage & I wanted to lock in some of that out performance having enjoyed a brilliant run in the stock from under £10 when the portfolio first bought in. This was also driven by the valuation with the PE of around 27x and a dividend yield of well under 2%.
In terms of reinvesting the proceeds from these sales a couple of names returned to the portfolio as their Scores, valuations and prospects looked satisfactory enough to justify a purchase, although one of them could be vulnerable to the virus causing public event shut downs, but one never quite knows how the potential spread of the Corona virus may hit any stock in reality. Aside from those I added to the portfolio's holding in Investec (INVP) as it has fallen further with the market and they have announced the pricing range for the Asset management arm which seems to be roughly as expected. This also helped to reinvest some of the proceeds of one of the sales which was also in the financial sector. If you'd like to find out more about the Scores that help to drive the stock selection and subsequent performance of the Compound Income Portfolio then please see the Scores & Portfolio menus or click here to learn more about the Scores and how you could gain access to them.
Market Timing Indicators
Given the fall in UK equity markets this month these all fell below trend into negative territory and therefore signalling a potential negative stance on the market. However as longer term readers may remember I don't follow these signals unless they are backed up by other economic indicators signalling a likely recession in the US to avoid being whip sawed. As of now these economic indicators are not suggesting that with the latest US PMI figure remaining just above 50 this month for example.
Nevertheless there is a risk that the Corona virus could dramatically cut global growth if it turns into a serious global pandemic, with the OECD for example suggesting a near halving of global growth if it does rather than a 0.5% hit for a contained outbreak. The more extreme outcome, or domino effect as they call it, would equate to a global recession. So no wonder markets have suddenly woken up to the potential threat of the virus, but we will need to see how it pans out from here and what response governments and central banks come up with in terms of fiscal stimulus and monetary policy easing to counter it. Indeed markets are already looking for the US Federal Reserve to cut rates by 0.5% fairly soon. Plus if the spread is contained, then I suspect in those circumstances this could turn out to be a run of the mill 20% or so correction and we could get a v shaped recovery.
Summary & Conclusion
A tricky month and an outlook which is difficult to call given the uncertainties surrounding the spread of the Corona virus. That and the negative signal from the market timing indicators suggests it is probably right to remain cautious for now, but not panic at this stage as we see how the virus and economies develop in the months ahead.
The main concern is that this all comes at a time when economies and markets are vulnerable after such a long rising streak which doesn't leave much protection to the downside in terms of valuation support or monetary & fiscal flexibility. As ever we seem to be continuing to sail in uncharted waters, although previous crises do offer some guides and it has usually paid to take advantage of crises and invest for the long term by being greedy when others are fearful as Warren Buffet says. Indeed the Sage of Omaha, said the other day, if you are likely to be investing for at least ten years then you probably should not worry too much about the effects of the current news in the short term, but you do need to be prepared to live with the volatility & the potential for your stocks to halve that it brings along the way (usually in a recession), which unfortunately we could be facing if we end up with a serious pandemic on our hands. So mind how you go and Keep Calm and Wash your Hands!