I’ve noticed that more than a few are bandying around the old adage of sell in May and come back in September. No doubt this usual seasonal caution is being accentuated by the recent rally which has been incredibly strong, despite the abundant dismal macro-economic news. I have to say that I am very cautious at this stage and I found myself selling out of a whole bunch of positions I opened up mid-March. I recently ran the maths on my various portfolios and worked out that on average I was only down between 5 and 10% from peak levels. Bearing in mind that EPS numbers for the coming year are suggesting a decline of at least 30%, I’m not confident that investors will make much headway in the next few months.
Which leaves open an important question – where should defensive investors park their money? Obviously, cash has its attractions for optionality reasons. I’d also suggest that some of the more defensive, income-oriented investment trusts – especially in the infrastructure and renewables space – are worth thinking about at the moment. If that latter option sounds appealing maybe the simple thing to do is to park some cash in the handful of fund of funds which invest in investment trusts in this alternatives space.
The two obvious candidates within unit trust land are Gravis UK Infrastructure and FP Foresight UK Infrastructure Income Fund. Both came off in price aggressively in the last few months and have rebounded to a limited degree. Both offer a yield of around 5% which isn’t too bad in the current zero bound environment. The first fund, the Gravis one, was at 127p per unit the last time I looked with a 4.97% yield – assets under management are now £554m. The fund peaked at 142p per unit and then hit a low of just above 100p – main underlying holdings consist of 19% solar, 16% wind, and 12% health with the biggest single holding Sequoia Economic Infrastructure. As for the Foresight Alternative their income shares were last trading at 106.87p after having peaked at around 132p. In terms of portfolio holdings renewables comprise 40%, infra 49%. Top holdings include International Public Partnership, Sequoia, and the Foresight Solar Fund
One of my reasons for caution is that although the current wave of infections seems to be under control, and slowly subsiding, my best guess is that the markets (and governments) will get well and truly spooked by the second wave – if it comes. I worry about this because although I believe many more people have been infected than we all think, we are still many miles off anything remotely resembling herd immunity.
Charlie Robertson, Chief Economist at Renaissance Capital has been looking at the same question and features a fascinating chart that is worth contemplating if you are more cautious. But we have incorporated that into the model we’ve been sending you. They’ve done a rough and ready reckoner and assume that only 1 in 20 people who have the disease have actually get tested, which means that 95% “of us with the disease do not get tested, mostly because we don’t have the virus seriously enough to warrant seeing the doctor, or tests are not easily available, etc. If countries test a lot, then we can change that 1 in 20 to … 1 in 10 or … 1 in 5 .. or in UAE’s case 1 in 1 (ie everyone who gets it will be tested)”.
Using that 1 in 20 notion – pure guesswork of course – the Renaissance economist has then also built in a fatality rate (cCFR) of 5.4%, to estimate the actual percentage of people (on April 29th) in varying countries who might have , or had, the disease. We’ve seen lots of estimates ranging from as much as 50% in say the Oxford study through 15 to 20% in Sweden and NYC down to a few per cent for most other studies.
“The point of this graph is to highlight we’re a long way from herd immunity, so the second wave threat is real”, says Robertson. For him that suggests that when the second wave comes some developing countries might be in better shape, partly because they have a much younger population. Maybe, but I’d also suggest that a nasty second wave will come as a nasty shock to investors – my gut tells me that many Anglo Saxon investors (in the US and the UK) are reckoning that north of 15% and as much as 30% of everyone has the disease. These estimates suggest that the real numbers may actually only be between 5 and 10%. If the next wave is as bad, if not worse than the first wave, then we should expect an abrupt total shutdown again. Which as economists such as Jonathan Portes at Kings suggest would be very, very bad for the economy. That said, looking at the chart if anyone is in a better position (more of the general population infected), then arguably Belgium, Spain and the UK are in the best position!
Of course, there are lots of variables moving around like crazy in these wild assumptions. One I would highlight is that the emphasis for the second wave – if it happens – might shift to treatment rather than a vaccine. I’m not convinced a cure will emerge this year but as with other pandemics such as AIDs, the attention might shift to treatment and cutting down fatalities – and also ICU impacts for survivors – thus dulling down the impact on health. If a cocktail of drugs could help manage infections for most patients, especially ‘younger’ ones, then we might begin to contemplate another wave with a tiny bit more optimism.