Green shoots vs straw clutching; Buffett beaten as allocators await Sage advice
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Light in the tunnel
Another dip for equities this morning hasn’t fully taken the shine off what’s been a better week for risk assets thus far. But there are still plenty of reasons to think allocators aren’t out of the woods just yet.
Some green shoots have emerged this week. Overnight, the US senate passed the $2trn US stimulus bill. There are tentative signs that case rate growth is peaking in Italy. And markets in general are on a firmer footing. Central banks have stepped in to ease liquidity worries, equity indices had one of their best days on record on Monday, and Bill Ackman is among those to have cashed in bearish positions.
But to some, those shoots look more like straws being clutched. The S&P’s 9.4 per cent rise on Monday was the tenth-largest daily increase in its history. But above it in that list are two days from October 2008. Back then, those increases were very much a false dawn: the index would drop a further 30 per cent before eventually bottoming the following March.
There are still plenty of risks remaining this time around, too. The stimulus bill is not as comprehensive as many would like, and the release of US unemployment data this lunchtime will show millions out of work. The US, New York in particular, has also established itself as the latest epicentre of the virus outbreak - and talk of restarting the economy by Easter looks destined to store up more problems for the future.
Several DFMs have used the past few days to start adding to their risk allocations again. But they will know that timing the market is impossible - and be conscious that they may well have to endure another difficult period before those calls start to pay off for clients.
Buffetted
Allocators of all stripes have been hit hard this month. Even the most famous investor of all has struggled to put a brave face on things. Bespoke Investment has been monitoring Berkshire Hathaway’s top holdings, and Warren Buffett’s portfolio has done just as badly as everyone else.
After recording its worst year versus the market in a decade in 2019, 2020 has been little better for Berkshire. Its portfolio holdings are down 35 per cent on average year to date, according to Bespoke. The weighted average drop for the top 20 holdings, at 27 per cent, is slightly better.
But big positions in banks like Wells Fargo and Bank of America have been particularly problematic, as has - needless to say - exposure to airlines. Unloved stocks like financials enjoyed a brief filip yesterday, with tech for once lagging behind, but that’s not enough to move the dial just yet.
Stocks like Apple have been better insulated from the chaos than many. That’s been a help for Mr Buffett, given the company accounts for more than a third of Berkshire’s portfolio.
The real saving grace, however, has nothing to do with stockpicking, but rather the sizeable cash pile that Mr Buffett retains. That crude but effective diversification strategy is one that some wealth managers may have looked on with envy in recent weeks.
Looking ahead, the question is how this cash will be deployed. The investor has thus far been tight-lipped as to whether he’s been buying the dip after months of caution. Berkshire’s AGM on May 2, this year taking place remotely, will likely reveal all.
Make or BBBreak
Capping off today’s US-centric theme is the news that Ford has been downgraded to junk status by S&P Global, making it the largest ‘fallen angel’ to date. The carmaker’s $36bn debt will now have to be digested by the high-yield debt market.
The US junk bond market is $1.2trn in size, compared with a $6.7trn total for investment-grade debt. The fears of those worried about companies being downgraded from BBB to junk have long centred on exactly this discrepancy.
The Fed has effectively pledged to prop up credit markets this month, but with a global recession on the cards, Ford isn't the first and won’t be the last high-profile downgrade this year. The junk bond bears are about to find out whether their fears have been justified - or whether the appetite for high-yield debt is sturdier than they predicted.
