"After this storm we will find out whose boat was in good order and whose really was not" – Brunello Cucinelli
Markets have rediscovered their mojo over the last few weeks and investor confidence is steadily building. At the time of writing, the FTSE 100 Index has recovered half of the ground lost since the news of COVID-19 caused the index to roll-over in February, ultimately bottoming on 23rd March. If one thinks that UK markets are performing remarkably well given the current uncertainty, Wall Street is in even more optimistic form with the S&P 500 Index now just 3% behind where it started 2020, and the tech-heavy Nasdaq Index now UP 8% this year. Put a different way, the FTSE 100 is up nearly 30% in two months. Fortune has favoured the brave.
We believe that the fundamental reason why markets have recovered is that capital markets, predominantly bond markets, have remained open and this has provided companies with the cash needed to remain solvent through the worst of this crisis. This has bought the companies time, firstly, to protect their staff and to remain solvent and, secondly, to begin looking again to the future and the hope of recovery ahead.
The trailblazers of the UK market recovery were companies such as Ocado, Just East and AstraZeneca, who are all clear beneficiaries of lockdown conditions and (for Astras) vaccine demand. The next share prices to creep tentatively higher in April were those of large, high-quality businesses, like Halma, RELX and Smith & Nephew (all Church House investments), where investors had conviction that these best-of-breed businesses would pull-through. What is particularly interesting is that in May this positivity began to spread to the share prices of businesses that are more cyclical and where operations have been hit hardest by the epidemic – this includes the likes of airliners, retailers and miners. To pick a few examples, EasyJet shares are up over 60% in the last month, Marks & Spencer up 25% and Rio Tinto up 25%. Before getting too excited by this recovery in cyclicals, it must be remembered that most of these stocks are still trading well below peak levels.
We do not know what shape a meaningful recovery from COVID-19 will take, and have never made investment decisions based on such projections. At Church House Investments, we believe that focusing on business fundamentals, always looking to own shares in the highest quality businesses and being disciplined in the price that we pay for these shares, stands us and our investors in the best place to earn reasonable returns and to manage risk over the long-term. This is what we do.
The full quotation from Brunello Cucinelli, the Italian businessman, philanthropist and fashionista, strikes me as also as a good note to end on:
We are not all on the same boat. We are all on the same sea and after this storm we will find out whose boat was in good order and whose really was not
– Brunello Cucinelli