Financial Mail

Looking at recoveries

- 6 months

Speculatin­g on shapes for a bounce in the global economy leads to talk of a ‘swoosh’

ollowing the crash that occurred through late February and into March, the global markets have staged an impressive recovery off the lows.

This has been most evident in the US markets, where the S&P 500 and the Nasdaq have rallied sharply off the lows. Those markets are heavily skewed towards big tech stocks (Facebook, Apple, Amazon, Microsoft, Google). Those are stocks less affected by the global Covid-19 pandemic than many other companies are, so it makes sense that their share prices have recovered fastest.

But questions are being raised about the sustainabi­lity of the rally and whether the high valuations on the broader market can be justified. Markets are battling with the unknowns of whether the economy will have a V-shaped recovery, a U-shaped recovery, a W-shaped recovery or an L-shaped recession.

In a bid to get away from the economic alphabet soup, a new shape has been mentioned: the “swoosh” recovery, as in the Nike tick. It implies a sharp economic drop, followed by a slow, gradual but steady recovery.

We can speculate on those long-term scenarios but the reality is that a great deal of uncertaint­y remains. Central banks are aggressive­ly trying to do what they can to avoid a Great Depression scenario.

In any case, the purpose of this column is to look at tech

Fnical analysis and try to decipher what we can expect from markets on a medium-term basis from the charts. What is interestin­g to note is that the S&P 500’s recent bounce, while greater in magnitude and speed, is not dissimilar to the bounces after the market crashes in 1987, 1998 and 2008. In all of those cases, the market dumped hard initially and then staged a bounce off the lows that lasted about 40 days. After about 40 days another leg lower followed that led to a re-test of the initial crash lows.

There has been much speculatio­n around whether this recent market crash will cause a re-test of the March lows.

The answer to that is unknown, but if history is any guide then a continuati­on of the recent recovery would be highly unusual without some sort of a reset first.

The weekly S&P 500 chart is showing signs that the rally is encounteri­ng an area of resistance where sellers are appearing. A 61.8% recovery of the February/march crash comes in at 2,935. That area seems to have attracted selling pressure. The underside of the 50-week moving average also comes in at around 3,000.

The 50-week moving average (50WMA) is a useful guide to a bull market or bear market environmen­t. As a rough rule, a bear market has price action sustainabl­y below the 50WMA and a bull market has price action sustainabl­y above the

3 years* 5 years* 7 years*

Fund size (Rm):

Total expense ratio (TER): 2.56%

its shares such as Alphabet and Tencent are considered media and communicat­ion services, The team has also held quality consumer staples such as Nestlé and Unilever in either of the two funds, as well as Moncler, the luxury ski clothing business.

Arcese says one promising US investment is Unitedheal­th. It is paying out fewer claims as all nonessenti­al surgery has been postponed and much of the bill for Covid19 is footed by the public sector.

The fund has maintained a half weight in energy mainly through Total of France, which has held up quite well, and Tullow, which invests mainly in Africa. Bank holdings have included DBS of Singapore and Jpmorgan. it unlikely that we would buy oil companies or some of the more highly geared financials. We will often own Microsoft, which offers what billions of people consider essential products … But BP would struggle to make our buy list as it is a captive of the oil price.”

Burgess says the mindset at Veritas is absolute, so it will not buy the best pharma simply because it should do better than the rest of the sector. It picks 30 shares that can both protect clients’ money and provide growth. He says that with 30 shares, instead of, say, 250, each share matters and as a shareholde­r the house has to pay close attention.

The only bank it holds is Svenska Handelsban­ken. Burgess says this has achieved exceptiona­lly high returns on capital not least because it focuses management and staff remunerati­on on long-term incentives, not short-term bonuses.

Looking at the top 10 shares in the portfolio, there are few stalwarts of the quality camp such as Alphabet (Google), Facebook and Unilever. Others look unsexy but dependable, such as the US cable TV businesses Charter and Altice. It also owns US health insurers Unitedheal­thcare and

Cigna, which face interestin­g times. Still, other shares such as Canadian Pacific Railway and BAE Systems look more squarely in the value camp.

Veritas also runs a real return product which protects the downside even further using futures. It has a single global team running the equity fund out of London, and an Asian equity fund based in Hong Kong. It is now seeding an emerging-markets fund but is wary about doing too much product diversific­ation.

The fund has a 13% strategic allocation to Veritas, which manages the Nedgroup Global Equity Fund on a similar basis. Veritas contribute­d in the first quarter from a 10% allocation to cash and low holdings in financials. Sands Capital, a concentrat­ed growth manager, did well by being overweight technology and underweigh­t energy. Arrowstree­t, a more quantitati­ve manager, did well from technology and healthcare.

Stanlib also invests with Sanders Capital, run by Lew Sanders, a former investment head of Alliancebe­rnstein, who is considered to be a pragmatic value manager.

Hosking Partners has been the poorest performer It is run by Jeremy Hosking. He was heavily exposed to financials, emerging markets and even airlines going into 2020. He has successful­ly invested in cyclical sectors, and this should have a useful role to play in the fund one day.

Grobbelaar says blending managers does not have to lead to a mediocre outcome. Over five years it has achieved a 2% excess return, more than double that of the global equity blend average. The fund was up 8% in the 12 months to March but suffered from being underweigh­t consumer staples and utilities. It also had a bias towards small and mid cap shares; no surprise as the underlying managers are encouraged to deviate from the large cap heavy benchmark.

Grobbelaar says the fund will look at index or Smart Beta mandates — there are elements of Smart Beta in the AB mandate already. But he says pure index investment would probably be managed in-house. It would be cheaper and Stanlib already has a competent index management team.

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