Commentary, March 2020 Asset Allocation

Macro Overview

Since the first meeting of the year in January things have certainly escalated. We were then talking about the initial reaction of equities after the emergence of the virus in China. Now we have seen the virus take hold around the world, with Europe now the epicentre and the US not far behind.

On a more positive note we have witnessed a significant improvement in China. Despite suffering in January and February, the number of new cases has reduced to a nominal daily amount and the number of active cases continues to fall by the day – as of Tuesday Hubei had zero “Suspected Cases”. This is hopefully the blueprint for the West, and whilst initial reactions may have been inadequate, there are now widespread lockdowns across Europe and measures being put in place to support businesses and those in need during these difficult times.

The Federal Reserve has enacted two emergency interest rate cuts, reducing borrowing costs to 0-0.25%, and the Bank of England has slashed rates to 0.1%. Both have also committed to new Quantitative Easing measures and the Fed has also promised over $1trn in market liquidity (repo market for those who are interested in the technicalities). Furthermore, the Fed has acted in coordination with the ECB, Bank of England, Bank of Japan, Swiss National Bank and the Bank of Canada to enhance liquidity in the market. This is because market liquidity in bond markets and financial markets in general has become an issue that needs to be addressed and the coordinated action shows that Central Banks are certainly attempting to do so.

The Fed’s actions are just one example of global efforts by Central Banks to reduce the economic damage of the Coronavirus. Interest rates have been cut (see above) in the UK, Europe, China, India, New Zealand, Australia and elsewhere. In addition, we are now beginning to see huge fiscal stimulus from around the world. For example France announced an enormous package, including guaranteeing up to €300bn of Corporate Loans; new UK Chancellor Rishi Sunak announced a package amounting to a 9% annual increase in spending, as well as a £300bn effort to tackle the virus the following week;  Hong Kong distributed helicopter money in the form of HK$10,000 to every citizen and even the US raised the possibility of targeted helicopter money as Trump’s virus policy saw a sharp U turn after seemingly underestimating the virus in its early weeks.

The following page shows a non-exhaustive re-cap of Monetary and Fiscal measures announced so far from major economies around the world, with fiscal spending so far equivalent to 2% of global GDP according to JP Morgan. There is likely to be far more to come, from the US and Germany in particular.

Central banks Q1 2020

Table 1; “Whatever it takes” – Global Policy action in response to COVID 19

Country Monetary Policy Actions Fiscal Efforts
US Interest rate cuts, from 1.50%-1.75% to 0.00%-0.25% (in two steps).
“Unlimited” QE
Other measures including a Commercial Paper Funding Facility, Primary Dealer Credit Facility and Money Market Mutual Fund Liquidity Facility
Tax payments deferred
$100bn for sick pay
$2trn package being passed through congress this week which could include payments to individuals
China 10bps cuts to both 1-year Loan Prime Rate and 1-year Medium-term Lending rate.
Targeted RRR cuts
RMB650bn social security tax exemptions
Targeted tax cuts
Fiscal deficit expansion above 3% expected
Hong Kong Cut policy rate following Fed’s cuts – interest rate set at 50bp above the lower bound of the FFR or the average of the 5-day MA of the overnight & 1-month HIBORs. Budget deficit of 4.2% of GDP announced, includes 100% loan guarantees for SMEs of up to HKD2m and a HKD10,000 ($1,200) cash hand out for each permanent resident.
Emergency fund set up
India No rate cuts yet
Steps to inject rupee and dollar liquidity into the market
None announced yet, country in full lockdown as of 23rd March so likely to see SME packages and other measures.


Japan Doubled upper limits of ETF and J-REITs purchases
New loan provision programme
Set to spend JPY400bn to support impacted individuals and in containment measures
Also to supply JPY1.6tr in financial measures, including new loan programme to SMEs
South Korea 50bps interest rate cut to historical low of 0.75%
Direct purchases of KTBs
Increased limit of Bank Intermediated Lending Support Facility
0.6% of GDP budget was approved on 17th March
KRW50trn of financing support for lower interest rate loans and credit guarantees
KRW1trn government reserves deployed
Tax cut for auto purchases
Eurozone QE stepped up – €120bn of net purchases in 2020 plus the €20bn a month already being done
Targeted changes to TLTRO III programme to make it more generous
Additional LTROs to provide liquidity support
So far joint effort limited – €37bn from EU budget redirected towards tackling outbreak


Germany According to reports it is set to take on €150bn of new debt as part of emergence package – radical shift from “Black Zero” policy
Includes tax breaks, support for businesses and a commitment to abolish budget rule in 2020 and spend whatever is necessary to fight the negative economic impactEmergency budget of €750bn on measures such as additional spending, state backed loans and loan guarantees
France €45bn fiscal plan
Postponement of taxes and social security contributions
Tax cuts
Support for businesses and individuals
Italy €25bn (1.5% of GDP) of direct fiscal measures
Extension of short-term working scheme for firms not working at capacity
Deferral of mortgage payments
Deferral of tax and social security payments
Additional worker and business protections
Spain €17bn (1.5% of GDP) in direct support measures to the economy
Unemployment benefits extension
Special allowance for self employed workers
Personal and SME support measures
UK 50bps interest rate cut, followed by 15bps cut to 0.10%
Additional £200bn of QE
New TFS aimed at boosting lending to SMEs
Banks capital buffer down to 0% (from 1%)
£330bn government guarantees for loans to businesses of all sizes
£5bn emergency response fund for NHS and other public services
Business rates holiday for 1 year
Sick pay cover
£1bn combined welfare boost and hardship fund for self employed
Mortgage holidays
Increases in Universal credit

Source; HSBC; “Whatever it takes goes Global”, Bloomberg

In terms of actual data points, much of the news coming out of the West in January and February was encouraging , such as European PMIs and UK employment, which hit a record high in January. Unfortunately this data now seems to carry far less meaning as expected future indicators are likely to show large falls in activity. We have already seen this in the January and February data from China, where they are ahead of the West with the virus; Caixin Services PMI fell to an all time low of 26.5, Retail Sales and Fixed Asset Investment fell more than 20%, and industrial production was down 14.5%. It is likely that the West will follow suit in the next few months as the data releases capture the impact of lockdowns around the world. More encouraging is the news that China is on its way back up to full capacity. According to JP Morgan (10th March) factory capacity is up to 90% for mid-large enterprises. On a more anecdotal basis, Apple has reopened all of its 42 Chinese stores as the impact of the virus there wanes. The chart below shows that coal consumption is starting to pick back up towards more normal levels after the shut down caused a slower recovery than usual after the Chinese New Year, this is a proxy for the recovery in Chinese capacity.

Daily coal consumption Q1 2020

Finally, as if there wasn’t enough volatility in markets, the OPEC+ deal between Russia and the OPEC Nations also fell apart during the period. As a result of Russia’s reluctance to comply with further supply cuts, the Saudi Arabian authorities flooded the market with its vast oil reserves, plunging the oil price below $40 a barrel. Fears about demand of oil due to the slowdown in economic activity associated with lockdowns and efforts to tackle the virus have compounded this price fall. The effects of the price decrease will depend on its sustainability at such low levels, however evidence of the ramifications for the profitability and dividend paying capability of US Shale have already been evidenced. Occidental Petroleum, Apache Corp., Marathon Oil, Continental Resources, Oasis and Ovintiv led the way as American oil companies cut capital spending plans by 30%.


Markets have been hit hard by the impact of the virus as businesses deal with the huge demand shocks caused by widespread lockdowns. Cinema companies, Cruise operators, Airlines, Auto manufacturers and Energy companies are just the headline examples but markets have fallen across the board as any early hopes for an earnings recovery in 2020 have dissipated.

The downward shock has marked the end of the 11 year bull market, and at some pace too. This has been the fastest move from market peak to bear market (in terms of days) ever recorded. As a result the VIX Volatility Index closed at a higher level on 16th March than at the peak of the Financial Crisis; such elevated levels tend to be an indicator of strong positive returns in the following 12 months.

The selling in equity markets has been indiscriminate as investors come to terms with the economic effects of shutting down nations to deal with the virus. All sectors are down year-to-date and as are all major equity indices, many of which have fallen in excess of 30%. Consumer facing companies and those that are highly indebted have suffered the most, as chart 2 below (right) suggests.

Bear market March 2020

Bond yields initially fell as markets anticipated the widespread interest rate cuts that were to come from around the world (particularly the Fed) as the virus spread, however, these gains sharply reversed as huge fiscal stimulus was announced, flooding the market with supply.

One area of the market that has given us hope is the Chinese market, which has held up fairly well during the crisis and started to outperform as the percentage of new cases started to fall. We are hopeful that, avoiding any re-escalation in Asia, Western markets will follow suit as they too begin to get over the peak in new cases.

China vs FTSE March 2020

Figure 1. Percentage change in markets and currencies from 30/01/20 to 26/03/20

Percentage change in markets and currencies Feb / March 2020

Activity & Positioning

It is an understatement to say that this has been an uncomfortable period for those invested in financial markets over the last couple of months. However, stock prices have fallen significantly and are now at levels that have historically yielded strong returns going forward.

We have therefore been adding to equities incrementally as markets have fallen, with a focus on quality companies with limited amounts of indebtedness and strong balance sheets. Calling the bottom in markets is difficult, if not impossible, and so our approach to adding equity exposure has been based on the improving risk/reward characteristics of markets as prices have declined. As a result, we have been judicious, gradually increasing our equity weightings to ensure we are fully invested in a market recovery that should arise as evidence of declining new cases and effective containment in the West emerges.

The retreat of Sterling during these times has compounded the opportunity in already cheap UK shares, and as a result we have been looking to add to UK equities. We have done this via additions to several UK funds that we know well and either already hold, or have held in the past. This has been in a number of tranches and in different funds to diversify stock specific risk.

Sterling’s weakness has raised the risk of denting future returns in overseas assets. Therefore, we have added a GBP hedged (negating currency risk) Nasdaq 100 ETF as this provides exposure to technology stocks that have de-rated after previously leading the market rally. We hope that his can be an effective way to capture US growth in a market recovery.

We have also added to Asia after a long period of underperformance of EM assets vs DM. There is the prospect of the region recovering faster than the West given the more radical measures and the effectiveness of response mechanisms put in place after the SARS episode in 2004. Asia will continue to be a significant contributor to global growth in the future and we have taken advantage of lower prices to increase exposure to this growth area.

Finally, we have added to Allianz Structured Return, a fund we have held in the past across the models (it remained throughout in some). It has suffered a sharp decline as the extreme levels of volatility caused large mark-to-market falls. The fund tends to rebound sharply from such events as the portfolio restructures and volatility declines, we believe it is an opportune time to move back into such a product.

Figure 2.  Portfolio changes since the November Asset Allocation meeting – RJIS

Harpsden portfolio changes March 2020


It has been an extraordinary period for the world since January, and the same can be said for our portfolios.

Given the uncertainty in markets and the volatility that has followed consequently, we have traded in the models to an unprecedented extent. This has been to ensure that we are minding the risks that come with uncertainty, whilst also taking advantage of the incremental opportunities that have arisen as markets have fallen. Cash has been allocated to different areas of the portfolios so that we can both diversify risk and benefit on the upside for clients.

Whilst I think that we should prepare for a couple of months of social distancing and potential lockdowns, evidence from Asia has proven this can be an effective tactic. There is also a race to find a vaccine and the hope that the end of the regular flu season will assist in stunting the spread of the virus.

So there is some hope that we can successfully tackle the virus in a reasonable timescale. As markets tend to be leading indicators (as prices discount future earnings) they often bottom long before the final economic effects are felt within economies, as we have seen in China. In the Great Financial Crisis, markets were up 53% before trailing earnings troughed! Therefore, it may well just take a peak in percentage increase in cases for markets to be able to assess a timeframe for the virus and potentially start to recover. We have seen enormous amounts of fiscal and monetary stimulus and I think we will probably see even more in the coming weeks and whilst we are wary of becoming complacent, or underestimating the spread of the virus, on a long term view equities at these levels are attractive assets to hold.

So hopefully we can emerge on the other side of this humanitarian crisis in the next couple of months with the threat to life limited as much as possible by effective actions by one and all. Following that we look forward to a rebound in activity and markets as the benefits of loose monetary and fiscal policy are felt by companies in the aftermath of the outbreak.

Best Regards,


Ian Brady                                                                                      Jack Byerley

Chief Investment Officer                                                        Trainee Investment Manager

26th March 2020

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Current Asset Allocation

Harpsden Asset Allocation March 2020

Important Information/Risk Factors:

Past performance is not a guide to future performance and investment markets and conditions can change rapidly.  Investments in equity markets will be more volatile than an investment in cash or fixed deposits.  The value of your investment may go down as well as up.  There is no guarantee you will get back the amount invested.  If your fund invests in overseas markets, currents movements may affect both the income received and the capital value of your investment.  If it invests in the shares of small companies, in emerging markets, or in a single country or sector, it may be less liquid and more volatile than a broadly diversified fund investing in developed equity markets.

The views expressed herein should not be relied upon when making investment decisions.  The article is not intended as individual advice and if you require advice or further information you should contact us.

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