March 2020

The final week in February saw the biggest weekly fall in equities, since the financial crisis in 2008. The catalyst has been a heightened worry that Coronavirus (or Covid -19) will expand from an epidemic to a global pandemic – killing many thousands of people and severely impacting travel, supply chains and consumer confidence. As of the month end, most equity markets around the world reached correction territory (a fall of 10% or more, since a recent high).

As we have discussed in recent publications, 2019 was an excellent year for equity investors. This was especially so in the latter stages of the year, where the near simultaneous British election result and signing of a US-China trade deal caused markets to soar. It is often the case that when equity markets move this sharply in one direction, at some stage there will be an equally strong reversal, and this is what we have experienced in recent weeks. The catalyst was unknown but, in this instance, we have a perfect storm to rattle stock market investors in Coronavirus – an unquantifiable subject matter, with the potential to severely disrupt supply chains, dent consumer confidence and impact the earnings of companies we invest in – alongside an already stretched equity market.

In terms of the longer lasting impact of Coronavirus, estimates vary hugely. The negative scenario is a hit to global GDP of 1%: this would have a material impact on corporate earnings and justify the recent market falls, but would not necessarily lead to a global recession. The unquantifiable nature of the situation makes any guidance even harder to make – but we do expect a strong response from Governments and Central Banks around the world, particularly in the form of fiscal spending (which was already in the pipeline). We take some comfort that China has appeared able to get on top of the epidemic – albeit with a more authoritarian method of public isolation than would be possible or practical in the West. It goes without saying though that the extent of spread, death-toll and impact is still a big unknown and that will be reflected in market sentiment, which we expect to remain volatile throughout March. Any significant recovery will not likely occur until the second quarter or even second half of the year.

CS Investment Managers portfolios are generally multi-asset and diversified in nature, built for the longer-term. We hold a number of safer and less volatile assets, which act as portfolio ballast at times precisely like these. Unless Covid-19 turns out to be a global catastrophe, which we believe to be unlikely at this stage, we see any further weakness as opportunities to add to favoured holdings, rather than sell at this juncture.

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Important Information Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

February 2020 update

Correction, not bear market 

We wrote in early February about the extent to which coronavirus (which causes the respiratory disease Covid-19) might impact markets, and we would wish to reiterate that view: 

Regarding the impact of such outbreaks or pandemics on stocks – we think what is important to understand is the base from where we started. Equities had a very good year in 2019, so a natural correction seemed possible – markets just need a catalyst, and Coronavirus is it. 

For coronavirus (2019-nCoV), our base case is that a 5% – 10% correction in equities could be merited. This is based off the short term growth impact of the virus coupled with already inflated equity prices due a retracement. 

What has changed since then? 

Since our note in Early February, the number of new cases being reported in China has slowed considerably – this led to markets recovering some, if not all, of the losses associated with the outbreak. The speed and effectiveness of China containing the outbreak surprised many. However, in recent days, the media has focused on new cases occurring throughout the world, with a focus on Italy. Markets have reacted to this news with a strong sell-off on Monday (24th Feb). Equities are down around 3% on the day, with safe haven assets rising (e.g. Gold +2.5%). 

Our view is that if China – with a large and dense population – was able to contain the spread of coronavirus, we expect other nations (developed or otherwise) to be as effective. Of course, as it spreads globally, this does have an impact on trade and confidence. There is no doubt that the coronavirus outbreak has and will have an effect on China and global GDP in Q1. And it is still possible that it becomes a materially worse global pandemic. Our base case remains that a natural correction (5% – 10% from mid-January peak) in equities is merited, with emerging market equities potentially falling up to 15%. For reference, the UK market is down nearly 6% from its January high. 

We would see this and further weakness as an opportunity to add selectively to equities, with gold remaining an anchor in portfolios. Our greatest conviction is in the UK market and increasing domestic exposure. Alongside this, opportunities are arising in Emerging Markets and Japan (where one also gets the defensive characteristics of the yen), although a more cautious allocation would also be prudent. 

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Important Information Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

February 2020

January often sets a precedent for the year ahead, and the first five days in the year even more so. Using data going back to 1950, the US stock market has been positive over 80% of the time for the year, when the first five days have been positive. So, on that metric, equities have a constructive tailwind for 2020. However, it was a tale of two halves for January – the bullish tones from early in the month came to an abrupt end, as global stocks gave up their gains for the year. The catalyst – Coronavirus (2019-nCoV). 

Coronavirus is dominating headlines, as investors grapple with trying to understand the nature, characteristics and impact of the “pandemic”. At this stage, we are not trying to predict these variables – if some of the greatest doctors and scientists in the world are struggling to assess the scale of what is unfolding, we are not in a position to form a better judgement than them. What we can do is assess the impact of “pandemics” both in our lifetime and beyond. The most recent and closest match is the SARS virus, in 2003. SARS also originated in China, so, unsurprisingly Emerging Market (EM) assets were hardest hit. Coronavirus is no different in that regard, with EM equities trending down since the outbreak was first reported. 

Regarding the impact of such outbreaks or pandemics on stocks – we think what is important to understand is the base from where we started. Equities had an excellent year in 2019, and had reached a level that was rich (on valuation terms), so a natural correction seemed likely – markets just need a catalyst, and Coronavirus is it. Interestingly, in 2003, when SARS was growing, developed equity markets actually rose. This was coming out of the recession of the early 2000’s, during a period where equities had been weak, therefore investors’ appetite for risk assets outweighed concerns of a widescale pandemic. 

For Coronavirus (2019-nCoV), our base case is that a 5% – 10% correction in equities could be merited should the situation continue to deteriorate. This is based on the short term growth impact of the virus coupled with already inflated equity prices due a retracement. At the end of January, the correction in global equities stood at 3% from their peak. 

With regard to Coronavirus and how we can monitor it, we believe it is best to observe the shape of the curve of total confirmed cases – and look for that to begin rolling over/flattening, in order to become positive on risk assets again. As at 31st Jan, the growth rate had been linear for six days, but has since picked up. We will reassess the situation when such a time (of curve flattening) does occur. An overweight position to EM assets, following this event, is likely. We would also use the wider correction in risk assets to add to our conviction in domestic UK assets. 

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Important Information Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

UK Election update

Politics in recent years have thrown up all sorts of surprises –and the latest UK election is no different. Whilst a Conservative majority was likely, very few anticipated the scale of the victory. Markets have reacted strongly to the result –with UK focused assets rising sharply, on the back of an “economic relief rally”. With a disorderly Brexit, and the tail risks associated with a Labour government now removed, we expect the undervalued, domestically focused assets to perform well. In this short note, we break down the initial market reaction and our expectations into 2020.

Unsurprisingly, Sterling and domestically (UK) focused stocks have rallied strongly on the back of the election result –notably Homebuilders, Real Estate, Banks and Utilities. The FTSE 250 (which is more exposed to the UK economy than the FTSE 100is) rose 5% by 9.00am London time. Sterling jumped to a 19-month high on the back of the exit polls being released but didn’t move higher thereafter. The current “ceiling” is largely due to the fact thatBrexit itself is still an unknown quantity –in terms of the real economic impact to the UK.In numbers, Sterling is now trading close to 1.34 against the US Dollar and 1.20 against the Euro.

For UK investors, the result is a relief –not due to any political preference but more so because a large overhang of uncertainty has been lifted. Sterling investors, like many businesses, have been paralysed by binary outcomes that mean decision making can only be based on chance and probability, rather than thought and rigour. Investment portfolios have needed to remain balanced to the outcome. Now, we move to a position of being able to allocate capital with more conviction –both domestically and overseas.

Whilst this election result appears positive for UK focused assets for the next few years, there are still risks lurking beneath. Brexit is still far from complete and the impact on the UK is still largely unknown. Furthermore, gains from the SNP also reignite the argument for a breakup of the union.

We would expect UK domestic assets to outperform international equivalents in 2020, due to valuation differentials making UK focused assets more favourable. We also expect significant fiscal spending to be announced in the next budget, which will provide a further boost to the economy.

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Important Information Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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