Asia and emerging market equities stage a come back
While all eyes have been on the US stock market and the performance of the big tech companies, Asia...
“Some companies are making money, while others are holding on for dear life,” said John Chatfeild Roberts, co-manager of Jupiter Merlin Income fund, on a catch up call this week.
“The result is that the long-term hunt for income at a reasonable price will be a challenge going forward.”
John’s comments come as companies – not just in the UK but all over the world – are announcing dividend cuts, suspensions and cancellations, as they desperately try to hang on to cash and stay in business, as the Coronavirus crisis continues.
In this Q&A the Merlin team members discuss the changes they have made to the portfolio in recent weeks and why bonds, gold and even Japan could help mitigate the ‘income famine’.
“We’ve been very actively moving the fund around,” said John. “The equity portion of the portfolio has been reduced significantly.”
At the end of 2019 there was 34.5% in UK equities, 14.7% in global equities and 1% in Asian markets equities. The rest was split 36.9% in fixed interest, 11.8% in ‘other’ (property and gold) and 1.2% in cash*.
By the end of March, equities had been reduced to 25.1% in the UK, 13.4% in global equities and 0.8% in Asian equities. Fixed income was down at 30.4%, but more government bond funds and investment grade bond funds, which offer potentially better yields today, were added. An increase in the gold position has also increased ‘other’ to 17.6%, while cash stands at 12.6%**.
“In a bear market you make money by not losing money.” John said.
“The prediction is that UK dividends could fall by as much as half this year,” John said. “Given £110 billion was paid in dividends last year, that’s a £50-£55 billion short fall, which will make it hard for pension funds and life companies in particular to meet their liabilities.”
Investors can of course look abroad for more equity income ideas, but companies in other countries are also cutting dividends.
“We’ve been looking at other sources of equity income,” added George Fox, the newest member of the team. “One example is Japan. Some 55% of non-financial companies listed on the Japanese stock market (the Topix) had net cash going into this crisis, so they have better balance sheets. There may be some dividend cuts there too, but is may be to a lesser extent, and Japan could be the ‘best of a bad bunch’ in terms of dividend payments this year. We haven’t acted on this yet, but we are discussing the possibilities.”
Read more about Baillie Gifford Japanese Income Growth
“Property would usually be an option,” continued Alastair Irvine, “But here, rents are also under pressure [as businesses have no money coming in]. Even infrastructure assets are not immune – toll roads, airports, etc have all been hit by the crisis.”
Indeed, reports suggest that 32% of ‘normal’ economic activity is currently taking place in the UK. Public transport is down 78% and road traffic is down 40%.
Andrew Greenup, co-manager of First State Global Listed Infrastructure fund, told us more about this: “Airports, railways and toll roads have seen their usage fall dramatically in recent weeks. Strong balance sheets should see these companies come through the crisis, but they are in the eye of the storm today.
“Energy infrastructure is also bearing the brunt of demand and supply disruption. Thankfully, there are some areas of infrastructure holding up a lot better: for example, mobile towers through the increased use of the internet and working from home, as well as utilities companies. And of course, some of these essential services are pretty recession-proof, which will bode well for the coming months.”
The one bright spot, as we at FundCalibre have mentioned previously, is bonds. They are not expensive (they saw prices fall very dramatically in March – the worst falls for many years) and they now have a decent yield.
“The other big plus with bonds is that coupons are contractual – so unless the company goes bust or defaults on their loans, the income will get paid.” said John.
“Gold companies will also be throwing off cash,” he continued. “The cost of extraction has been falling, as it’s an energy intensive business. We bought gold shares on 17 March and, so far, they are up some 40%.”
Fidelity Asia Pacific Opportunities manager, Anthony Srom, is also a fan of gold equities and thinks they will be a ‘winner’ in the next decade. He’s not a fan of fixed income or currencies, which he thinks will be the big losers.
The Bank of America is also positive about the price of physical gold. It says it has negative correlation to interest rates (which should stay very low for a long time) and the record central bank balance sheets and government fiscal deficits should cause the price to surge. The company has gone as far as increasing its price target for gold from $2,000 to $3,000 by the end of 2021.
Read more about Merian Gold & Silver fund
“On 23 March 2020, the S%P 500 bottomed,” said George. “Since then it has risen some 23% – that’s technically back in a bull market. But let’s not get ahead of ourselves.
“Looking back at the past eight major bear markets since 1929 – those that have lasted 12 months or more – each has experienced 2.5 ‘rallies’, with gains between 10% and 46%, before they finally made it into a proper bull market. In the four minor bear markets (those lasting less than 12 months) only one – in 1987 – had rallies, rising 15% and 12% in two short bursts.
“And there are still a number of risks which could, in our view, lead to markets falling again and new lows. We could have a set back with vaccine trials, second waves of the infection, or even more lockdowns. So we’re cautious of the recent bounce. But we could be wrong, and we could be through the worst (in markets at least), and there are plenty of opportunities in even in this difficult environment.”
*Source: fund factsheet, December 2019
**Source: fund factsheet, April 2020