US technology names spearheaded the charge with the Nasdaq Index (top five constituents: Microsoft, Apple, Amazon, Alphabet (Google) and Facebook) up 15% for the month. The FTSE 100 made a more modest return of just over 4%, but it would be ungrateful to dismiss this positive return in the midst of a crisis. Furthermore, the FTSE 100 is now almost 20% above its low for the year recorded on 23rd March.

Equity markets tend to get the headlines (generally negative ones, if it is the BBC reporting) but we believe that it is debt markets that all investors should be paying at least as much attention to at the moment. First and foremost, bond markets have recovered quickly from the worrying period in early March and are now functioning well. When the Federal Reserve, Bank of England, ECB, et al stepped-in a month ago with their ‘QE infinity’ policies, bond markets breathed a huge sigh of relief and companies across the world have since had great success issuing debt (borrowing money). As Jeremy Wharton, our joint-CIO, put it in his recent credit comment:

With the primary market open for business, all records have been broken with a flood of issuance, which has been received with no apparent indigestion so far.

Companies have been able to borrow capital to keep themselves functioning through these difficult times and this has allowed equity investors, who are at the opposite end of the capital structure from debt holders, the flexibility to look once again to the long-term prospects of businesses and to worry less about if a company will be able to stay afloat in the short-term. For example, we have been equity investors in Diageo for many years and saw the share price take a reasonable hit in March, falling a third since peak last summer. The market worried that customers would hold off buying spirits such as Tanqueray gin or Johnnie Walker whisky this year and that this would in turn lead to a cash shortage at Diageo. However, on 24th March Diageo successfully borrowed €1.75 billion of fixed rate euro and £300 million of fixed rate sterling denominated bonds. One month later, Diageo raised a further $2.5 billion of dollar bonds. As an aside, Church House took part in the sterling issue in March (in our credit funds) and we are now holders of both Diageo debt and equity. This was an emphatic demonstration of both Diageo’s credibility as a borrower and the willingness of bond markets to lend. The 23 March marked the low-point of Diageo’s share price, which has since begun to recover lost ground.

This is just one example, but there have been a myriad of companies that have also raised capital in debt markets globally and the backing that central banks have given here has been invaluable. As Jerry says above, it has, in fact, been a record month for primary market issuance in UK corporate bond markets. This has helped to underpin equity markets and been a fundamental factor contributing to reduced volatility and more rational investor behaviour.

Over the long-term, companies will need to demonstrate to equity holders that they can return to ‘normal’ trading and they will of course have to pay back the debt that they took on during the COVID-19 crisis. For the time being, functioning debt markets have bought time for management teams to adapt and rebuild their businesses.