113. Reflecting on 2020 and the madness of markets

7 January 2020 (pre-recorded 5 January 2020)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Staci West (SW): Hello and welcome to the Investing on the go podcast. A lot happened in 2020 and to make sense of all that happened, we’re breaking down the biggest topics of the year and memorable moments.

[INTERVIEW]

[0:13]

SW: Let’s start with the obvious one – coronavirus.

We all had plans for 2020 before Covid-19 brought the world to a halt. And stock markets around the world were continuing to rise. Then we started to hear about a flu-like illness that began infecting people in Wuhan, China. Things quickly spread and, in March, the WHO declared a global pandemic.

On 9 March 2020, the US stock market (as measured by the S&P 500) fell by 8%. On the same day, the UK’s FTSE 100 dropped 7.7%. Over the course of the next few days, we experienced the fastest bear market in history.

Stay-at-home orders came quickly and life as we knew it began to change. The world came to a screeching halt. Clouds of pollution disappeared from the skies, oceans gleamed, and we could hear the birds sing. There was a global run on toilet paper and flour. Schools closed, businesses closed and, as Richard Woolnough, manager of M&G Optimal Income, M&G Strategic Corporate Bond and M&G Corporate Bond fund, put it, “it’s a stay at home recession and will result in a collapse of economic growth.”

A few areas were able to stay in business and some evened flourished as those that hadn’t already converted started doing their food shopping online and we all learned to use Zoom.

And let’s not forget that around the same time Saudi Arabi and Russia – two of the world’s biggest oil producers – started an oil war. Only in 2020 could the price of a barrel of oil turn negative! Martin Cholwill, manager of Royal London UK Equity Income had more to say on the subject:

Martin Cholwill [excerpt from episode 59]: “Yeah, it’s interesting I think. If you look at the oil price clearly was extraordinary the other day when the share price, when the oil priced went actually negative because of one of the futures contracts closing where people couldn’t physically take delivery of oil.

But you know clearly with the, there has been a big step down in demand for oil, based on what’s happening in the shutdown of the global economy, and supply by OPEC just hasn’t been cut by the same amount as demand has fallen. So there is surplus oil in the market and that’s reflected in the falling spot price. Although it is noticeable that if you look at the oil price curve and the forward oil price – going forward five years – and the fall there has been much less pronounced five-years forward than the spot price. But clearly based on the current oil price, there isn’t the cash flows within BP and Shell to sustain their current dividends.”

[2:40]

SW: Ah. Dividends. Let’s face it, it’s been a torrid year for them.

Over the past 100 years, there have been at least four periods when dividends have fallen sharply. During the recession, after World War One and the Spanish Flu pandemic, dividends fell around 35%. After the Great Depression in the 1930s, they fell about 55% and by 50% after World War Two. During the more recent global financial crisis they fell 25%. So, the big question on everybody’s mind during 2020 was “how much this time?”

Shell, made its first cut since World War Two, reducing its payment by two thirds and, in doing so, relinquishing its position as the world’s largest dividend payer. On an earlier episode of the podcast, Dr Niall O’Connor, manager of Brooks Macdonald Defensive Capital fund, said this:

Dr Niall O’Connor [excerpt from episode 75]: “But what I think the market really hasn’t fully factored in is how low dividends are forecast to stay. So there are tradable dividend futures, and they’re suggesting that the UK equity yield for 2025 will only be 3%. And obviously UK income investors have been used to between 4% and 6%. So I don’t think it’s really fully appreciated how difficult it is going to be to generate income going forward.”

SW: But while dividends may be scarce, they will not disappear completely. While low interest rates have reduced income levels for cash and bonds in the past decade, and the pandemic market crash has meant that company dividends have been cut, there are still a number of funds in different asset classes that have a yield above 4%. At the time of recording, 19 Elite Rated funds yielded over 4%, including Man GLG Income, M&G Emerging Markets Bond, Schroder Income, VT Seneca Diversified Income and BMO MM Navigator Distribution.

With lockdown forcing companies to cancel, cut or suspend their pay outs, we were also reminded of the fact that investment trusts can use their revenue reserves in times of crisis to support their dividend payments. The City of London Investment Trust, TR Property Investment Trust, Schroder Oriental Income, Murray International and Scottish Mortgage Investment Trust all maintained dividends this year.

In the summer, many of the restrictions were lifted and we ventured out for the first time in months. ‘Eat out to help out’ was a short but welcome distraction and then the kids went back to school.

[5:05]

SW: November was all about a second lockdown and the US election, which took a lot longer than expected and, as has been the way with Trump’s presidency, was accompanied by allegations of fraud and fake news.

At time of recording, Trump has still yet to formally concede the race to Biden. But as James Thomson, manager of Rathbone Global Opportunities pointed out, “Despite the ugly politics, we still believe the US should form the largest part of our portfolio, because that’s where the growth is. US companies have consistently grown profits more than four times faster than the rest of the developed world over the past 15 years.”

James Ashley, chief markets strategist at Goldman Sachs, gave us his initial reaction to the election on the morning of Wednesday 4th November 2020:

James Ashley [excerpt from episode 103]: “But you can’t think of these things in isolation. You’ve got to marry it all together, right? So right now, as we have people listening to this podcast, it’s going to be all about what do we think the US election is going to do to the market? But you don’t operate in a bubble. The COVID story is still going to be hyper important for a really long period of time.

It’s not just COVID, it’s about the yields that are on offer, it’s about the market pricing central bank reactions. Again, you know, where do we have the China 10 year trading relative to the US 10 year, for example. So there’s all sorts of elements there. But if we take a step back and say, it’s not all about US politics – it might feel like that this morning, but it’s not. If we think about COVID once again, I think emerging Asia comes out on a relative basis ahead of Europe and ahead of the US at the end of 2020.”

[6:38]

SW: We finally got some good news at the start of December. Just a week after Giles Rothbarth, co-manager of BlackRock European Dynamic told us about five possible vaccines before Christmas, Pfizer was the first to announce success.

Giles Rothbarth [excerpt from episode 104]: “If we knew nothing about that phase two data and simply looked for, I guess, what we’d call the external point of view. What, how likely is a vaccine to work if it’s had decent phase two data to get approval at phase three? And the answer for respiratory vaccines, when we look at historic examples, is around 80%. So I guess one way to think about this is that we’ve got five shots on goal between now and hopefully Christmas, each with an 80% chance of hitting the back of the net. So, you know we’ve got to be, I think, cautiously optimistic, that we could well be moving into this final phase for the market of this COVID downturn, whether it should be light at the end of the tunnel.”

[7:39]

SW: And finally, not to be left out of the 2020 virtual party, Brexit went down to the wire and we got a deal on Christmas Eve.

As Richard Buxton, manager of Merian UK Alpha, commented: “The potential damage to both sides from a ‘no deal’ – exacerbated by the ongoing impact of the pandemic and lockdowns – was too great to go down that road, and for all the inevitable bluster, threats and counter-threats along the way since Brexit, we have an eleventh hour agreement. Skinny, lightweight, the bare minimum required but a deal, nevertheless. This has to be good news for investors in UK equities.”

A global pandemic, historic market crashes, property fund suspensions, the highest price of gold, civil unrest, 2020 is certainly one for the history books. 2021 on the other hand has all the promise of a Friday at 5pm…anything can happen!

Today’s podcast has been a highlight reel of the biggest stories this year, but to get these insights when they happen visit our website and subscribe to our weekly newsletter sent every Friday. Also, don’t forget to subscribe to our podcast and YouTube channel for more weekly interviews.