The statistics and company releases for the first quarter have confirmed the economic impact of the Covid-19 pandemic. In the USA GDP was 4.8% lower than in the first quarter of 2019, with earnings at the companies to have reported so far down by an average of 21%. Europe has proved slightly more resilient, with GDP and earnings falling 3.8% and 18% respectively. As always, we fine-tune our analysis on the basis of publications from our “bellwether” companies, noting in particular that all of them have commented that the guidance they provided to the markets for 2020 is no longer valid and that they are not in a position to update it. In common with everyone else, they are faced with the need to react to an unknown situation.
Starting with industrial activity, BASF reported an 8% fall in volume chemicals and a 3% drop in speciality chemicals for industry, with the drop in sales rising to 20% in April, and capacity utilisation rates dropping to 60%. However, sales of speciality chemicals for healthcare, consumer products and agriculture were not affected. In a break from its usual approach, the company abstained from any update on its global macroeconomic forecasts.
On the investment front, sales at Schneider Electric saw a like-for-like contraction in sales of 6.4%, with falls of 19% in Asia and more than 20% in China, despite a recovery from the end of March that the company described as vigorous. Sales in Europe continued to grow up until the end of February, but were down 3% over the quarter, with the company predicting a 25% contraction over all or part of the second quarter. Despite this, the company emphasised the strength of orders for productivity equipment over the longer term, something confirmed by Japanese equipment supplier Fanuc, where orders rose 8% in the first quarter.
Turning lastly to international trade, Kuehne & Nagel reported a 10% contraction in shipping freight volumes over the quarter, with air freight down by around 15% as cargo space on passenger flights all but disappeared.
Against this fairly gloomy, but not unexpected, background, financial markets recovered after their March collapse. In the US, the S&P 500 gained 12.7% over the month, and is now down less than 10% since the end of 2019. It is now only 1% lower than it was on 30 April 2019, with a P/E on prospective earnings for the next year above 19, which is high on a historical basis and is explained not only by the US market’s extreme sensitivity to liquidity, with which it is flush, but also to the weighting of the GAFAM stocks (Google, Apple, Facebook, Amazon, Microsoft) in the index; these major market capitalisations (3 of them are each worth more than $1 trillion) are valued at more or less 30 times earnings. The Eurostoxx 600 posted a more modest recovery, gaining back 6.3%, taking the drop for the year to date to 18% and leaving it 13% below its level at 30 April 2019.
The compartments of the Rouvier SICAV saw gains over the month of 4.6% for Valeurs, 5.5% for Europe, 3% for Évolution and 1.1% for Patrimoine. Following the analysis of the Rouvier Valeurs portfolio we set out last month, the selection of defensive stocks now accounts for 52.4% of assets, and gained 8.4% over the month. The value allocation, which was trimmed by two stocks that were considered too risky by the committee, now accounts for 17% of the portfolio and saw first signs of gains (3.7%) which look likely to continue. The themes of oil, finance and transport continued to be shunned by investors and their allocation in the compartment has not yet started to recover (-0.6%).
Despite the supposed ‘paradigm shifts’ under which valuations no longer have anything to do with market performance, we remain firmly focused on our twin-pronged ‘Quality & Value’ approach, the guarantors of performance over the long term, and place an equal importance on the valuations of our defensive stocks and the resilience of our value stocks.