Equity markets staged a strong recovery in April, continuing the rally that started in late March. Why? Probably a combination of three reasons. First, the speed and extent of fiscal and monetary intervention by the authorities. Second, the speed of the drop in equity markets during February and March had left sentiment at historically low levels. Third, there were tentative signs that new infections (and deaths) from Covid-19 had peaked. Whether this is just a 'bear market' rally or the start of a new bull market remains to be seen; more on that later.
The recovery, as so often is the case, was led by the US, specifically technology/internet stocks. In the Nasdaq 100, Tesla (US:TSLA) topped the charts, gaining 49.2 per cent, but the big beasts were also very strong; Microsoft (US:MSFT) was up 13.6 per cent, Apple (US:AAPL) rose 15.5 per cent, Amazon (US:AMZN) was up 26.9 per cent, Facebook (US:FB) up 22.7 per cent, Alphabet (US:GOOGL) up 16.0 per cent and Netflix (US:NFLX) rose 11.8 per cent. Crises tend to accelerate trends that are already in motion.
The Nasdaq Composite was up 15.5 per cent and the S&P 500 12.7 per cent. Continental European markets made smaller gains, with the Dax up 9.3 per cent, the CAC up 4.0 per cent and the MIB, just 2.0 per cent. In the Far East, the Nikkei 225 was up 6.8 per cent, China A All Share 5.2 per cent and the Hang Seng 4.4 per cent. In the UK it was mainly about small- and mid-cap stocks. The FTSE All-Share (Total Return) Index gained 4.9 per cent, but within that, the FTSE 100 was only up 4.0 per cent. The FTSE 250 Mid Cap Index was up 8.9 per cent and the FTSE Small Cap +9.8 per cent. The Aim market did even better than the Nasdaq, gaining 18.8 per cent.
In commodity markets, the main story was the collapse in oil due to falling demand. For a short period, spot prices for immediate delivery went negative in the US. Brent crude was not as severely impacted but did briefly drop below $20 (£16) a barrel. There is nothing like low prices to concentrate minds, and OPEC along with other major producers agreed to cut supply from May onwards. Brent crude ended April at $26.31 per barrel, up 3.4 per cent on the month.
Gold continued to be in demand, gaining 6.1 per cent over the month. It finished April at $1,700 per ounce (oz). Earlier in the month, it hit $1,790 per oz, its highest price since October 2012.
Performance
The JIC Portfolios 100th month was its best! Its gain of 17.2 per cent did, of course, follow its worst month of -16.1 per cent in March. It was pleasantly ahead of the FTSE All-Share's 4.9 per cent and leaves it down 8.9 per cent in 2020 compared with -21.4 per cent for the All-Share. Since inception in January 2012, the JIC Portfolio is up 202.5 per cent, (14.2 per cent annualised) comparing favourably with the 55.1 per cent total return for the FTSE All-Share Index (5.4 per cent annualised).
Last month's worst performer was this month's best. RockRose Energy (RRE) was up 40.8 per cent. Results were reassuring as was its decision to proceed with the final dividend. It still needs to see oil prices recover to above $30 a barrel, but time is on its side. Other commodity plays followed closely behind. Anglo Pacific (APF) was up 40 per cent, helped by decent first-quarter results and a positive statement, along with an increase in the quarterly dividend. Anglo is well placed to pursue further royalty agreements. Anglo Asian Mining (AAZ) was up 37.1 per cent, helped by the higher gold price and the news that it had managed to fly a shipment of gold dore to its refiner in Switzerland. My two gold mining exchange traded funds (ETFs) made good gains, with the VanEck Junior Gold Miners ETF (GDXJ) up 40.7 per cent and the L&G Gold Mining ETF (AUCO) up 37.9 per cent. SigmaRoc (SRC), the aggregates business, was up 31.3 per cent after an overhang of shares was bought by Peter Tom. He has vast experience and success in the industry. He grew Aggregate Industries into a leading building materials group before selling to Holcim in 2005. He retired as chairman of Breedon Aggregates last year. Games Workshop (GAW) bounced back 39 per cent, PayPoint (PAY) was up 23.3 per cent, Serica Energy (SQZ) 20.7 per cent and Renew (RNWH) 20.2 per cent. My two largest positions, Biotech Growth Trust (BIOG) and Worldwide Healthcare Trust (WWH) were up 24.8 per cent and 11.6 per cent, respectively. Biotech Growth Trust was helped by its exposure to Gilead, the developer of Remdesivir. This is the drug that has had some success at reducing the time to recovery of Covid-19 patients.
Only four stocks were down, the worst being Duke Royalty (DUKE), which fell 17.7 per cent. Duke gave a Covid-19 update on 2 April, which clearly has not reassured shareholders. It will see a reduction in royalty payments from some of its partners, which will potentially lead to write-downs. It will work with its partners to defer payments if necessary. Duke itself has low operating costs, and I think it is well placed to trade through this crisis. It intends to continue paying out a share of its operating cash flow to shareholders. The next quarterly dividend will be announced in mid-June. With lockdown conditions easing around the world, it is to be hoped that the second quarter will see the worst in terms of reduced royalty payments. I have it as Medium Risk/Medium Reward. I'm itching to raise the Reward rating to High, allowing me to add to my position. However, in the absence of a further update, I think discretion is the better course of valour. Aberdeen Standard European Logistics Income (ASLI) was off 5.3 per cent, Bloomsbury (BMY) 5.1 per cent and Syncona (SYNC) down 1.4 per cent.
Activity
I entered April fully invested, having shovelled all the remaining cash into stocks during March, (see last month's dairy). After frantic trading in the first quarter, April was very much quieter. There were nine trades in total, starting with my halving of Strix (KETL) on 7 April at 177.2p. It had jumped nearly 30 per cent from my mid-March purchase, and I felt the valuation no longer merited a High reward rating. Medium reward points to a 2.0 per cent position for me. On 9 April I sold Schroder UK Mid-Cap Fund at 470.8p. Its near 20 per cent discount to net asset value (NAV) attracted me during March. On 9 April, I benefited from it being tipped in the Daily Telegraph's Questor column, which pushed the share price to parity with NAV. Another outright sale was Games Workshop (20 April at £50.21 and 28 April at £59.60). I felt that with a 65 per cent recovery in the share price from its mid-March low, the potential reward was no longer attractive.
I reduced my exposure to RockRose Energy on 9 April at 904.8p and 30 April at 885p. The reward from RockRose is potentially huge, but so is the risk. If oil recovers and stays above $50 a barrel, RockRose should be an excellent investment. If, however, oil stays sub $30 for a protracted period, RockRose will suffer. In my view, the oil price will recover as demand picks up, so my reducing Rockrose should be seen in the context of matching risk with reward. While on that topic, I added a new oil company to the portfolio and for the first time, an individual overseas holding. I bought Swedish listed, Lundin Energy (SW:LUNE) on 23 and 30 April at £17.43 and £20.50, respectively. I have given it a medium risk/high reward rating, pointing to a 4.0 per cent position for me. It has over 10 years of reserves and a proven track record of successful exploration. If it was listed in the UK, it would be around the 60th largest company in the FTSE 100 Index. It operates in a shareholder-friendly region, with 90 per cent of its production from the Norwegian North Sea. It is an industry-leading low-cost operator with operating expenditure expected to be $3.2-$4.2 per barrel by 2020. It is operating cash-flow break-even at under $17 a barrel. Its production of 93,000 barrels of oil per day (boepd) in 2019 is forecast to grow to 160,000-170,000 boepd this year. By ramping up production at the Johan Sverdrup field, it expects to produce 200,000 boepd by 2023. It has announced a $1 a share dividend in respect of 2019, being paid in four equal instalments during 2020. At the current price of SEK 220, that gives a yield of 4.4 per cent. (UK shareholders are subject to a 30.0 per cent withholding tax, reduced to 5.0 per cent due to 'double taxation treaty'.) While the dividend is welcome, I have bought in anticipation of significant capital appreciation over the next few years.
The only other trade was to add to SigmaRoc following the clearance of the stock overhang. At 29p, it was being valued at around 0.3 times the value of its reserves compared with about 1.7 times for Breedon. The business remains open, and I believe it is running at cash-flow break-even. Once things start to return to normal, it should be in a strong position to benefit from increased spending on infrastructure.
Be active, or do nothing?
The saying goes: 'If in doubt do nowt'. I broadly agree. It is generally better to do nothing than give in to fear, and panic at the wrong moment. Things eventually recover and 'time in the market, rather than timing the market' usually wins. Despite that, I have been more active than usual this year. I raised some cash in January and February before reinvesting in March. I thought it would be helpful to see if it had all been worth it. It was with some trepidation that I used ShareScope to find out how the JIC Portfolio of the 31 December 2019 would have performed had I sat on my hands. Thankfully, the result was rather pleasing. I hadn't been wasting my time. The 'do nothing' JIC Portfolio would have fallen in value by 13.7 per cent through to the end of April compared with the actual result of an 8.9 per cent drop. For a portfolio that started the year at £502,000, the difference is £24,000. It will be fascinating to record the difference as we progress through 2020.
Portfolio structure
This year, I have been trying to skew the portfolio towards positions that should benefit from the current crisis and to avoid companies that might not survive the economic hit. Balance sheet strength is of paramount importance, as is the ability to be flexible with costs.
At 30 April, 40.1 per cent of the portfolio was invested in funds (investment trust and ETFs). Within that, 16.6 per cent is in healthcare/biotech, which should prove, at the very least, defensive as the beneficiaries of increased medical spending. I have a substantial exposure (17.7 per cent) to gold, mostly through ETFs. Should equity markets re-enter panic mode, I think it would be a haven in the short term. In the longer term, one only needs to look at the price chart to see gold seems to be in a bull market. That is not surprising given the colossal fiscal and monetary stimulus being undertaken around the world. I have a further 10.1 per cent in oil and gas. I am happy with that position today, but could have been smarter with my timing; I should have reduced in January/February.
I think the oil price is likely to be much higher in a year as supply and demand return to balance. Of the remaining positions, I think they will survive and have either robust business models or the market is taking too dismal a view of their prospects. For example, Renew should see business hold up, given its exposure to maintaining critical infrastructure. Bioventix (BVXP) should see little disruption from Covid-19 and, given the role of Vitamin D in immune systems, might even benefit from increased testing for Vitamin D deficiency. Moneysupermarket (MONY) should hold up, with customers continuing to search for cost savings on utility bills, insurance and so on. Strix should be relatively stable as its water filtration segment grows, and the market for kettles holds up with the natural replacement cycle. Positions that fall into the latter category are Tremor International (TRMR), SigmaRoc, Duke Royalty, Bloomsbury and Watkin Jones (WJG).
Outlook
Where to next? There has been a decent recovery, although narrowly led by the large tech stocks. Sentiment overwhelmingly seems to be sceptical, with consensus clearly believing this is just a bear market rally. It's much the most straightforward course to take as if one is bullish and wrong, not only are you open to ridicule, but one also loses money. So, where do I stand? On a year's view, I am still bullish, but suspect that after such a strong recovery the summer months will be harder going. I would not underestimate the impact of all the fiscal and monetary stimulus; it has got to go somewhere. Based on 'don't do as I say, do as I do', my cash position increased to 7.6 per cent during April, and I anticipate it will go a little higher. I am a little more cautious and want some firepower should markets pull back. I also, of course, have my 17 per cent exposure to gold and defensive areas such as healthcare and biotech. For me, it is about stock picking rather than trying to time markets. That is where I think I can add real value over the longer term.
