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Weathering market volatility amid the coronavirus pandemic

As we emerge from the second quarter of 2020, it’s clear that this year will always be remembered for coronavirus, the ramifications of which have included unprecedented stress on the healthcare sector and the disruption of lockdown for all of us. Our thoughts are with every family who has been affected by the current pandemic.

The beginning of the year marked the launch of our FC Financial Planning (FCFP) portfolios, and while the timing may not have been optimal, it has proved to be an opportune time to test their ability to weather market events.

The chart below shows how the FCFP Cautious, Balanced and Growth portfolios (A, B and C) have outperformed the FTSE All-Share index (D) in the first half of 2020.

Throughout the six months to the end of June, the allocation to high quality bonds such as US Treasuries and US TIPS (inflation-protected treasuries) helped our portfolios to manage market volatility and generated positive performance.

During times of heightened fear and uncertainty, investors usually seek shelter in high-quality safe haven bonds such as US government debt. This is known as a ‘flight to quality’, and our exposure to these kinds of assets has served the portfolios well and provided ballast during recent market stress. However, on some days during the first quarter no asset class was safe, with investors selling the most liquid holdings in portfolios to meet margin calls. On such days, liquidity risks were heightened as even the assets considered safe havens, such as US Treasuries and gold, sold off.

The FCFP portfolios were able to offer some shelter from this global sell-off. The portfolios have a quality-growth tilt towards companies with the ability to generate high levels of cash, strong balance sheets and lower levels of debt. These companies have tended to perform better as investors scramble to hold businesses that are in a stronger financial position to weather the current economic lockdown and beyond.

The energy sector, specifically oil, was significantly affected by the Covid-19 outbreak. In February, a disagreement between OPEC (Organization of the Petroleum Exporting Countries) members sparked a price war and, resulted in the oil price (WTI crude) plummeting over 70% over the course of the quarter. Sectors such as healthcare and technology have been more resilient, with some individual stocks generating positive performance over the period.

Lockdown has changed everything for us as a society. It has also provided our environment with some much needed respite from damaging human activities. While economic shutdown, or anything resembling it, isn’t a viable solution to our environmental impact, it has given many of us time to pause for thought and reflection.

Over the past few months we have seen clear evidence that this ‘great pause’ has translated into a notable uptick in demand for sustainable funds. Gone are the concerns that performance needs to be sacrificed in order to invest in responsibly managed businesses, and gone are the assumptions that the investment universe isn’t large enough. The events of the past few months have given many of us a wake-up call, leading to a demand for higher social and environmental standards and more accountability from our governments and companies.

Second quarter rebound

It’s scarcely believable to be reporting on a quarter which saw the S&P 500 rally 21% in sterling terms, finishing June in positive territory for the year so far. This was a three-month period that saw most of the Western world in lockdown, the US experience significant social unrest and the oil price go negative. From the start of the quarter, however, investors tentatively looked to take advantage of the enormous falls in markets experienced during March. Along with opportunistic buying, many investors took comfort from the levels of support being committed by central banks and governments across the world, and selective economic data that surprised to the upside. 

The chart below illustrates the performance of the FCFP portfolios through the second quarter of 2020, highlighting their performance characteristics at a time when markets are experiencing a rally rather than a sell off. While Q1 demonstrated their resilience to global sell offs, Q2 suggests that as well as experiencing a smoother journey in tough times, our portfolios are able to capture the upside when market sentiment is more positive.

Looking ahead

With hopes of recovery and a return to a somewhat ‘normal’ world beginning to surface, global markets have rallied strongly out of the lows of Q1.

The amount of money now in the system, and the continued heightened levels of cash on the sidelines, mean it seems unlikely that we will revisit those lows. Sustainable sectors and sustainability orientated businesses are very well positioned to benefit from increased investment in industries including green technology, green batteries, green and low-carbon vehicles, infrastructure for plastics recycling, energy efficient building materials, green infrastructure and renewable energy production.

FC Financial Planning continues to hold sustainability at the heart of our core portfolios and we are constantly monitoring how we could further improve the impact which our clients’ investments are making. You can read more about our approach to sustainable investments in this blog.

Despite the obvious ongoing uncertainty and risks, we remain confident in investing across traditional asset classes for the long-term. Over recent weeks, the FCFP portfolios have had to weather extreme volatility and bear negative performance. However, we believe we can continue to generate strong risk-adjusted returns for our clients’ portfolios while continuing to protect capital on the downside.

For more information about our financial planning services, click here.

FEATURING: Andy Hammond
Andy joined Francis Clark Financial Planning (FCFP) in 2017 having previously been a Partner and Head of the Investment Management Team at a solicitors firm… read more
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