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Q1 2020: the quarter the world changed forever

The outbreak of the coronavirus has had a devastating impact on all of our lives. While keeping ourselves healthy is the primary concern during this period, maintaining a continuing means of income comes a very important second. Few sectors understand this more than charities, where the focus is on helping the neediest in society...

Q1 2020: the quarter the world changed forever

At the start of the year, prospects were good, suggesting the continuation of positive returns. However, the latest quarterly report produced by Teknometry and Charity Investor Group shows average returns of -14.59%. Immediate and future growth prospects are threatened and early indications suggest the effects are likely to be far worse than those that occurred during the financial crisis of 2008 and the stock market crash in 1929.

In my last article 2019 - A good year for charity investments, I analysed how 2019 had proven one of the most successful years on record for the investment returns of balanced discretionary Charity Funds. How quickly things can change…

COVID-19 background

China reported the virus in January and immediately went into lockdown. Developed markets were slow to react but as the virus spread through Europe and on to the United States, the realisation was that lockdown was the only way to stem the flow. This was essential to prevent the loss of life but has had serious consequences for the economy as recession becomes unavoidable. In response, governments around the world announced huge stimulus packages to support business, the self-employed and individuals.

To compound the problem, Russia and Saudi Arabia increased the supply of oil on to an already saturated market, as agreements through OPEC to limit supply floundered. Saudi Arabia’s strategy was designed to force high-cost producers, such as North American Shale, out of business. As the effect of the lack of demand became apparent, oil prices fell to their lowest level for 18 years. Brent crude fell to $22.58 (£18.19) a barrel, its lowest since November 2002. However, there is one potential benefit in that low oil prices may eventually help fuel a future recovery.

Impact on markets

In the UK, the Freedom Index All Stock Equity index recorded falls of 25.5%. As the Bank of England reduced interest rates to 0.10%, sterling fell against the dollar. Oil and gas and the consumer services sectors were the greatest fallers. US Equities lost over 20% in values (25.8% in GBP terms) according to the Freedom Index US All Stock Index. The Federal Reserve cut interest rates and after initial delays, a $2tn stimulus package was agreed by the US congress. Unemployment rose to 7% at the end of the quarter. The Information Technology and Healthcare sectors were the best performing as remote communication became the norm and scientists sought to provide drugs and vaccines that could alleviate or stop the spread or effects of the virus. The Eurozone saw similar losses as deaths tolls mounted in all countries with Italy and Spain the worst affected. Japan, Asia and Emerging Markets saw similar losses.

Chinese and Hong Kong equites were the best performing as China’s stringent lockdown had led to COVID-19 cases being reduced and economic activity began to recover at the end of the quarter. In the bond market, government bonds particularly US Treasuries were in demand as volatility increased. In the commodity market, industrial metals declined as demand evaporated, while the safe havens of gold and precious metals showed small increases.

Analysis

The scale of this quarter’s losses in the charity fund sector can be seen in comparison to the returns achieved across all previous quarters since the inception of the universe. 


So, what has been the response from the asset managers managing these charity portfolios? Across the quarter there has been a definite decline in the proportion of assets held in Equities, with Bonds, Cash and Alternatives being the beneficiaries.


The average 12-month income yield for charities in the universe was slightly higher in Q1 than previous quarters at 3.34%. This however does not reflect the sharp decline that occurred towards the end of the quarter when a large number of businesses in the most affected sectors announced they would now be cutting or suspending future dividend payments. The impact of these decisions will be felt in upcoming quarters. Companies cutting dividends include large well-known corporations such as HSBC and Royal Dutch Shell who have cut their dividend for the first time since World War Two.

The outcome is that dividend yields in the foreseeable future are likely to be a lot lower than in previous years. This will impact charities that are seeing a reduction in the overall value of their investments and are already faced with seriously reduced income as a result of the lockdown. Reduced revenue from closed charity shops alongside a lack of donations arising from non-participation in sporting events which can raise significant income will make cash flow a serious concern over the next few months.

Summary

The outlook ahead is unpredictable and what occurs in the next month may dictate the magnitude of the challenge we face. If lockdown succeeds in avoiding the catastrophe predicted for health services and that appears to be the case, then there are grounds for optimism. But, if relaxing lockdown to boost the economy produces a second wave of infections that cannot be isolated and contained, this would undo the efforts and sacrifices that have been undertaken and would put us firmly back at the starting blocks.

One thing is certain; it will take a long time to recover from the effects of this virus.  Things are unlikely to be the same again and despite the tragedies, we may learn from this terrible event and choose to tread a different path in the future.