Hi, I’m Nancy Kilpatrick from Legal and General, and I’m writing to you today to give you an update about the Future World Plan, which you’re invested in.
How did the plan perform compared to the market, over the last three months? Did we have a good quarter or a bad quarter?
The fund performed in line with global stock markets over the quarter, returning -17.9%. This compares with the UK stock market return of -23.8%, showing some element of benefit from being invested in all regions rather than solely the UK, the latter of which saw a more major impact. That said, it has been an unprecedented time for all of us, both on a personal level, in the way that we all lead our everyday lives, and also markedly for our investments as the impact of the COVID-19 pandemic plays out across economies and every investment market. For almost everyone with investments therefore, this has absolutely not been a good quarter.
As soon as there were signs of global contagion and most notably outside China and surrounding Asia; fears led to unprecedented selling of assets – almost every asset class with the exception of (some) government bonds and cash fell in value over the quarter. At times we even saw pressure on low-risk government bonds as investors looked to raise and stockpile money from anything that they could sell, and at levels not seen since the 2008 financial crisis.
What has however, also been unprecedented has been the response by central banks and governments to help prop up markets and to attempt to limit the longer-term impacts of this pandemic. Interest rate cuts, more stimulus has, at the time of writing led to a record ‘rebound’ last week, particularly as the US government announced more measures, extending the already significant action it has taken in an attempt to stabilise global markets. Year to date (14th April), the US stock market is down only 12% with the lows this year so far showing a return down over 30%.
While action across the pond might feel irrelevant at these times, what the US does is particularly important to your investments as the region makes up around 60% of the global stock market and most significantly, the plan in which you are invested. The relative resilience of the US market can mainly be attributed to its exposure to technology companies, which as you would imagine have been the least worst performers at these times when working from home has significantly increased. The other side to this is the UK market (c. 6% of the fund), which tends to have more of an exposure to oil, gas and mining companies which will fare worse when activity drops due to lockdown scenarios.
That said, it is still very early days and wholly likely that we might still see more negative moves from here – equally, should ‘normality’ resume, and a vaccine be found and efficiently distributed, we could very well see a relatively quick rebound in stock markets from current levels (which remember are largely driven by sentiment). More on that in the next section with what investors might expect going forward…
What can savers expect for the next quarter?
We will, as you would expect, spend a lot of time thinking about what could happen from here. It is deeply concerning that markets are not looking to fundamental data but are very much now reacting to how the virus plays out. This makes it almost impossible to predict what is to happen however, we do have three scenarios that we consider at this time to try to understand how our investors will be impacted.
The first being the big initial shock that we have seen, followed by a ‘rapid’ rebound. This would be a situation where there are a few weeks of lockdown, then a gradual lifting of restrictions. This is our most positive case and we warn that there will still be quite an impact on unemployment and a significant impact on global GDP growth; around -3%, similar to what we saw in 2008. The rebound in economic growth (which lag markets by at least six months) should then follow in 2021.
The second scenario involves the potential of a second wave of infections and then a longer period of lockdown. Here we see this initial shock, a lockdown for months rather than weeks, with the most harmful impact being a second wave of infections. This level of shutdown and additional impact of a second wave, could then lead to some bankruptcies and have a larger effect on economic growth (some -5% to -10% of global GDP).
The third, the worst case and least likely in our view, is something akin to the Great Depression mark 2. In that scenario life as we knew it does not return to normal; the virus lingers and a new lockdown of sorts remains for the longer-term in that people are wary of being physically close to other members of the general public. This leads to travel, leisure and entertainment industries (in addition to commercial property, transport and energy) not recovering. This could mean significant company bankruptcies across industries leading to more than 20% decline in global GDP.
When it comes to official estimates; The UK’s Office for Budget Responsibility has published a virus scenario – based on three months of full lockdown with a further three months of partial lockdown, they see the economy (not stock markets) shrinking 35% in Q2 2020 and unemployment spiking at 10% before a sharp recovery. Separately, the IMF produced a report called The Great Lockdown which forecasts a 3% contraction of world GDP in 2020 as a whole.
As we have said, these are unprecedented times and the outlook is very difficult to predict. What we have seen however, is a pulling together of communities, governments and policymakers to support both businesses and every economy. So far this has shown positive signs and so long as the spread of the virus can be controlled, we see the first two scenarios as the most likely, with a shorter-term hit to growth, but an eventual recovery. What supports our relative optimism at this time are (albeit very early) signs that the rate of infection in Europe is slowing (with Spain and Germany now relaxing some lockdown measures), daily deaths are declining, and we have had news that China has approved human trials for three potential vaccines.
Whilst there is no doubt that these are difficult times, if we all continue to pull together, maintain faith, and continue to support the companies that we are invested in, we will get through this and will recover. How long it will take is the biggest question mark.
How has Legal & General driven positive social change in the past quarter?
From Q1 2020 we will be voting against all companies where the CEO also serves as board chair (excluding Japan, due to unique features of this particular market). We have advocated a separation of these roles for many years because having a distinct CEO and board chair provides a balance of authority and responsibility that we believe is in both the company’s and investors’ best long-term interests. Board independence is equally important to ensure robust oversight over company strategy and executives’ decisions – CEOs should not be able to ‘mark their own homework’.
Last year, we supported 51 shareholder resolutions in the US asking for a split of functions of board chair and CEO, and voted against 40 directors proposing to combine roles of board chair and CEO without the prior approval of their shareholder.
On a company specific level we are pleased that, following active engagement with DTE Energy over a three-year period, and providing clear guidance of our intentions of voting policy from this quarter; we have seen the company separate CEO and board chair roles in advance of our vote being cast.
Views expressed are of Legal & General Investment Management Limited as at 15 April 2020. Forward-looking statements are, by their nature, subject to significant risks and uncertainties and are based on internal forecasts and assumptions and should not be relied upon. There is no guarantee that any forecasts made will come to pass. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision.
Your updated fact sheet will soon be available to download in the BeeHive. If you’d like to ask a question in the next update or share your thoughts, you can get in touch with PensionBee via email or Twitter.
As with all investments, past performance is not indicative of future performance and you may get back less than you start with.
