Monthly performance commentary - May 2020

22 May 2020 5 min read

March of this year saw one of the fastest and deepest drops on record for share indices as market participants became aware of the scale and impact of COVID-19 on the global economy. The S&P/ASX 300 fell 21% in March — the worst monthly fall since October 1987; and in the US, the S&P500 Index fell 12.5%, the worst monthly fall since the Global Financial Crisis (GFC). These numbers put into perspective the scale of the dislocation we have seen — many global investment professionals see this crisis as worse than the GFC.

What has been different about the pandemic, compared to the GFC, is that governments and central banks globally have responded quickly with fiscal and monetary stimulus on a colossal scale. In Australia, the federal government introduced the Jobkeeper allowance, doubled its Jobseeker payments and the Reserve Bank (RBA) stepped in to support the functioning of financial markets through the purchase of government bonds. More importantly to global financial markets, we saw the US government pass the largest stimulus package in history via the US$2tn CARES Act which provides aid to households, businesses, local governments and financial markets. Through this package the US Federal Reserve has provided a much needed backstop to markets, purchasing corporate bonds for the first time in its history and providing loans to banks, dealers, holders of asset backed securities and small businesses alike.

These actions provided support to the market and the rebound in Australian and global share-markets in April was spectacular, with the S&P/ASX-300 Index up 8.8% and the US S&P500 market index up 12.7%. However, this is against a backdrop of the revenue of many companies falling off a cliff. We have observed that the rally in the US has been narrowly led by the technology sector, with companies such as Amazon and Zoom performing strongly over this period.

How has the NGS portfolio fared?

Over March-April the NGS Australian Shares – Accumulation option fell -11.6% compared to the fall in the index of -14.3%. Loss mitigation came from the release of tax accruals and the underlying portfolio outperforming the index. The NGS Australian Shares – Pension Option also did a reasonable job mitigating losses in March and was the best performing Australian Shares Option in the Super Ratings survey.

The NGS International Shares option fell 4.0% over the March-April period versus the MSCI World ex Australia Index which fell 5.0% in Australian dollar terms over the same period. Through this period, the portfolio benefited from having a high allocation to consumer staples companies such as Koninklijke Ahold Delhaize N.V (which operates supermarkets across the US and Europe) and Kimberly-Clark (whose products include Kleenex toilet paper, surgical gowns and disposable face masks). Producers of consumer staple products tend to a better job of preserving capital in market downturns as the demand for their goods is less dependent on levels of economic activity. While the International Shares portfolio had holdings such as SouthWest Airlines, which was negatively impacted by COVID, this was counterbalanced by holdings in Zoom — a company which many of us are now all too familiar with — and Gilead, the producer of remdesivir which looks to be one of the most promising drugs in the fight against coronavirus.

How are we positioned?

Another key difference between this situation and the GFC is that that concerns about solvency relate to companies rather than banks. How companies fare is heavily dependent on how long the shut-down lasts, whether there is a second wave of infections and when/whether a vaccine can be developed. Given the recovery in markets, it appears there is more optimism than pessimism around the answers to these questions. At NGS, we are continuing to monitor all relevant factors relating to the speed of exit from and impact of the COVID-19 shutdowns.

Despite uncertainty around the direction of the market, we have a high level of conviction that the managers we have appointed will on average navigate it well. Both the Australian shares and the International shares portfolios at NGS are substantially invested within active managers (as opposed to passive managers that hold the index) who have been able to identify value and outperform in these dislocated markets. If history is a good guide, then volatile markets are very favourable for active management and we expect to see a continued outperformance of the shares portfolios in these market conditions.

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