April 2020: market rebound fueled by investor optimism, Smart Portfolios outperform
Markets rebounded strongly in April as investors became more optimistic on the economy. This was fueled by news on the development of an effective treatment for Covid-19 and evidence of a slowing number of new global cases.
What happened in global financial markets in April?
The US Federal Reserve (Fed) provided a boost to market sentiment, with the central bank outlining that they will, if necessary, go further to support the economy, using a variety of tools to promote its employment and inflation goals.
Christine Lagarde, president of the European Central Bank (ECB), also announced that she is 'fully prepared to increase the size of the Pandemic Emergency Purchase Programme (PEPP) and adjust its composition, by as much as necessary and for as long as needed'.
These extra measures from central banks could be needed sooner rather than later if recent economic data is anything to go by. The UK’s purchasing managers’ index (PMI) for construction activity came in at 8.2 last month, the lowest level since Markit Group’s survey began 23 years ago.
In the US, the latest data indicates that 33.5 million Americans have filed for unemployment benefits since the lockdown began, with 15% of workers now receiving benefits for the week ending 25 April. In Europe, the ECB has projected that the eurozone economy could shrink by as much as 12% this year.
Even though we witnessed a recovery in global equity markets in April, there is still a great deal of uncertainty around future economic growth. Economies have made tentative steps to re-open, but the balance between slowing the rate of transmission and kickstarting the economy remains fragile.
Figure 1: Covid-19 confirmed cases, deaths and recovered per day
Source: John Hopkins University, IG
Even with the world economy walking a tightrope, global equities posted gains of 7.9% last month. US equities advanced the most, with the S&P 500 index returning 9.3%, which means it is now down just -4.8% since the start of the year. Meanwhile, UK and European stocks both rose by 4.3%.
In commodity markets, crude oil (tracked by WisdomTree WTI Crude Oil – CRUD) is now down -73.6% year-to-date as oil prices turned negative for the first time in history due to excess supply which sent storage costs soaring. A negative futures price for oil implies that owners were paying to sell their contracts so that they did not have to take delivery. Elsewhere, the price of gold rose by 4.4%, taking its returns for 2020 so far to +17.1%.
Figure 2: global market returns in April
|Market||ETF code||April 2020||Year-to-date|
|Europe ex. UK||IEUX||4.3||-14.5|
|Global Corporate Bonds||CRHG||4.3||-0.8|
|Global High Yield||GHYG||4.9||-9.5|
Source: Bloomberg, IG
UK corporate earnings show lockdown impact
Looking at major corporate news, several major UK banks announced earnings which don’t make for pretty reading. HSBC suffered a 48% fall in pre-tax profits in Q1, as bad loan provisions were increased to $3 billion from $585 million last year. Barclays’ Q1 2020 pre-tax profit fell to £900 million from £1.5 billion a year earlier, although total income was up 20% to £6.2 billion. Additionally, Lloyds pulled its guidance for the year after Q1 pre-tax profit dropped 95% to £74 million.
Perhaps the industry hit hardest by Covid-19 are the airlines. Recent updates from firms in the industry provide us with little reason to be optimistic about their future, with the majority of airlines taking steps to safeguard short-term liquidity.
Richard Branson, founder of Virgin, has said that Virgin will need government support to stay afloat. Virgin has already axed a third of jobs and announced that its operations at Gatwick will cease indefinitely. EasyJet has grounded its entire fleet of aircrafts for at least two months, furloughed 4000 staff and secured a £600 million loan from the UK government’s COVID corporate financing facility (CCFF). Similarly, IAG plans to cut its workforce by a quarter whilst Ryanair said it will keep 99% of its flights grounded until June at the earliest.
The chart below indicates the sharp decline in demand that commercial airlines have face since the start of February.
Figure 3: commercial flights per day
Smart Portfolio performance: outperforming the average wealth manager
Our range of ready-made portfolios extended their outperformance against their benchmarks in April. On average the portfolios are now 4.9% ahead of their respective benchmark since the start of the year.
Figure 4: Smart Portfolio performance
|Conservative||3m Libor +1%||1.2%||0.1%||1.1%||-0.3%||0.6%||-0.9%|
|Balanced||ARC Balanced Asset||5.1%||4.2%||0.9%||-1.1%||-7.3%||6.2%|
|Growth||ARC Steady Growth||6.5%||5.6%||0.9%||-2.3%||-9.7%||7.4%|
|Aggressive||ARC Equity Risk||7.5%||6.9%||0.6%||-5.9%||-11.6%||5.7%|
Source: IG, ARC
Our cautious approach meant that we were in a strong position going into the market crash, which helped to better protect our clients’ investments. After adding to the amount invested in equities and longer-dated bonds in March, we also outperformed the average private wealth manager during April’s recovery.
The majority of returns can be attributed to our allocation towards US equities but we also saw gains in other asset classes such as our holdings in gold and fixed income. We found that some of our competitors show a strong home bias towards UK stocks in the equity sleeve of their ready-made portfolios, which have underperformed against the US.
Our current asset allocation for our moderate, balanced, growth and aggressive portfolios can be seen below.
Figure 5: Smart Portfolio asset allocation
|ETF code||ETF name||Moderate||Balanced||Growth||Aggressive|
|ERNS||iShares GBP Ultrashort Bond||17%|
|IGLS||iShares UK Gilts 0-5yr||17%||16%||3%|
|IGLT||iShares Core UK Gilts||18%||15%||12%||4%|
|INXG||iShares GBP Index-Linked Gilts||4%||4%||4%||7%|
|IBTM||iShares USD Treasury Bond 7-10yr||3%||5%||6%||3%|
|IBTL||iShares USD Treasury Bond 20+yr||4%||3%||4%||3%|
|IWDG||iShares Core MSCI World GBP Hedged||4%||11%||8%|
|ISF||iShares Core FTSE 100||3%||4%||7%||7%|
|MIDD||iShares FTSE 250||2%||2%||3%|
|IEUX||iShares MSCI Europe ex-UK||3%||4%||2%|
|EUXS||iShares MSCI Europe ex-UK GBP Hedged||6%||5%||6%||10%|
|CSP1||iShares Core S&P 500||5%||8%||17%|
|GSPX||iShares Core S&P 500 GBP Hedged||19%||27%||27%||27%|
|EMIM||iShares Core MSCI Emerging Markets||2%||3%||4%||7%|
|SGLN||iShares Physical Gold||4%||4%||2%||2%|
You can see a full breakdown of the Smart Portfolio’s performance on our website. You can also compare our fees against other UK investment managers to see how much faster your wealth could grow with IG.