5/8/2020 12:00:00 AM

CIO Report: Credit and equity markets rally during best April in 82 years

Best month in decades

April 2020 was the best performing April in 82 years and the best performing month since 1987 for the S&P 500.

Stock markets continued the rally off their March 23rd lows driven by the Federal Reserve substantially increasing their purchases of assets from $4.2 Trillion in early March to $6.65 Trillion on April 27. This extra cash has buoyed both credit and equity markets.

A CLSA broker survey of Australian fund managers in mid-late April suggests managers are holding higher than normal levels of cash, 55% expect the ASX200 to reach another low, 76% were bearish on a 3-month view, but 60% were bullish on a 6-month view. This is understandable: uncertainty is high as we don’t know how long lock-downs will last or what the world will look like afterward. However, as uncertainty abates, investors will become more bullish and stock markets will increase.

You can’t wait for clarity. The best bargains exist at the time of maximum uncertainty but, by definition, no-one knows when that is until afterward. It may already have passed. But because the future remains cloudy, opportunities remain plentiful. Because the consensus view is bearish it means to some extent negative outcomes are already priced in and less likely to happen.

The severity and swiftness of the recent stock market falls caught many investors off guard. Even Warren Buffett had been a net seller of stocks in April, primarily airline stocks. 

The Federal Reserve was praised by Buffett in his recent annual meeting for its decisive action to prevent contagion. However, this also meant Berkshire Hathaway, often seen as a white knight for troubled corporates, had limited opportunities to buy distressed companies. Interestingly, Buffett also said buying back Berkshire Hathaway stock wasn’t more attractive in March than it was in January, even though its stock price had dropped by 30%. This highlights the optionality that he saw in holding cash at the time, and also the impairment to earnings and valuations he has appraised in Berkshire Hathaway’s stable of businesses.

With the Fed now underwriting risk no other market participants were willing to do, sentiment has improved and boosted the stock market. The stocks benefited over the last few years in the low growth, low-interest-rate environment have continued. The winners have stayed winners. The US markets have been a significant outperformer in April driven by technology stocks again as they have strong balance sheets and are relatively more immune to the issues facing the general economy.

We have increased our market exposure during April and will continue to do as we find compelling investment opportunities.

Please find below updates from April supplied by each of the portfolio managers.

Thank you for entrusting your capital with us.

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