May 2020: A sunny month

Well, May 2020 was the month that highlighted, as the Economist put it, Boris’ short-Cummings. Remember much else happening that month?

In May the UK started unlocking, slowly. The government(s) has(ve) been slowly releasing the strait jacket to fit what people (in London at least) have been doing anyway for a week or two. I’ve stayed healthy, and my boundaries have enlarged slightly – by which I mean I had my first Zoom party, and there are slightly more restaurants available on Deliveroo.

London has been looking beautiful. Full marks to the first person to name correctly the parks shown below – just some of the ones I’ve visited this month.

Markets up over 5%

Meanwhile, the market’s mad bounce back in April has continued. Quite calmly.

Equities are up more than 5%. Ah no, sorry, not in the UK they aren’t. And in fact the GBP fell against major currencies, which would normally push FTSE up relatively, but not this month. FTSE lagged by gaining ‘only’ 3.3%. Yet another good month to be globally diversified.

Australia had the stand out month, though I haven’t been following closely enough to know why. I do remember buying a lot of Australian equities in the last two months as my rebalancing system signalled they had fallen underweight, and their rebound has left me feeling almost overweight Oz.

Rebalancing the portfolio to a fixed allocation is about buying low and selling high and Australia over the last few weeks is a textbook example of how it can work well.

Bonds continued to climb but they looked positively pedestrian compared to equities.

I have been deliberately staying slightly aloof from the markets.

My portfolio is now only down about 5% from peak. Income levels look like have dropped more than share prices – very unusually – but time will tell. I’ve been letting my equity exposure remain underweight (except Australia!), but keep my bond exposure on target. I’m also materially less leveraged than normal, with my margin loan over £100k smaller than it might be.

What market slump?

I understand three clear arguments for why equity markets have recovered.

The first reason is that interest rates have cratered. To the extent that share prices reflect the net present value of future cashflows, having a lower time value of money increases the value of the future, and thus increases share prices.

The second reason is the notion that the lockdown disruption is only temporary. In the scheme of big global brands like Walmart, MMM, Disney and Amazon, 2020 is just a blip. I am more sceptical of this argument, especially for the travel / leisure sectors.

And then there is the third reason which is the wall of money from central banks. This is used to buy bonds. Not only brand new ones issued by governments, but also second hand ones sold by somebody else. So the sellers have to put their money somewhere. And they refer to arguments 1 and 2 above.

Reasons to be fearful

From where I sit though there are still very much reasons to be fearful.

In the US, where as I write this many cities are under curfew. I think Donald Trump is worried if he loses the election he may end up in prison. He will fight this election not to boost his ego and satisfy his competitive spirit. He will fight this election like a frightened dangerous animal.

In the UK, the Brexit monster is re-awakening. And Her Majesty’s Government has been shown to be wearing some very translucent clothes. I am reminded of my mindset a few weeks before the referendum in 2016; I can see how things can get worse much more easily than I can see how they get better.

And as to the FTSE, it really isn’t selling itself to me at the moment. No tech businesses, plenty of banks, a bunch of mining/resource companies.

My gut has been asking whether I really want 23% of my invested portfolio in UK equities, and concluding I don’t. My head has been pushing back – saying altering my target allocation is the refuge of the market timing scoundrel.

I’m reducing my target UK exposure

I want to trim my UK exposure, at least until the Brexit question has more clarity. I don’t mind holding UK government bonds – they can’t afford to let rates rise / prices fall. But UK equities feel like tarnished goods. I’m reducing my target allocation from 23% to 20% – by about 10%.

Do I just trim UK equities, in favour of bonds? Or do I allocate UK equities to other geographies? I think the latter makes more sense – UK equities are only 5% of world equities so I’m just converging slightly closer to the world benchmark, while retaining a significant degree of home bias.

I’ve decided to shift my UK exposure into various places. I’m increasing my ‘International’ exposure from 20% to 22%, half in equities and half in bonds. And I’m upping my US equity exposure from 45% to 46%, despite worrying that the US markets have a nasty awakening in store for them. This all leaves me 91%/21% Equity/Fixed Income, instead of 92/20. A very slow shift towards fixed income, but a shift nonetheless.

I’ll record this update on my Investment Philosophy log. And try to resist the temptation to drop the UK weight in half again!