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Market Commentary - July 2020

Posted by Paul Jourdan on 13/Aug/2020

July saw the lockdown restrictions in the UK significantly eased, with the number of new confirmed cases being reported per day falling to around 1,000. Opinions as to what policies are best to deal with pandemic are scattered widely, but seem to map at least in part onto political beliefs across the traditional left-right spectrum. On the one hand (the right of centre one) there are the Fizzlers, who broadly believe that the reaction to the pandemic has been wildly overdone and that the global pattern of infection is suggesting that after the first wave of cases the rate of new infections will drop and fizzle out completely before Christmas. This group will point out that the mortality rate of the virus is possibly not much higher than a bad flu season and appears to have been falling over the summer. They are advocates of opening up the economy again and keeping it open. On the other hand (the left one) there are the Save-Lives-At-Any-Cost-ers (SLAACers for short), who broadly believe that public policy should only concern itself with minimising the number of COVID-19 cases. For this group, no economic sacrifice is too great to save someone from COVID-19. This thought was set out clearly on 23 April in the Scottish Government's "Framework for decision making" paper, where it said that "our entire strategy is focused on preventing every avoidable death" and "there is no such thing as a level of 'acceptable loss' ".

Both ends of the spectrum of opinion make some good points, but have significant flaws. On the one hand the Fizzlers tend to ignore the complexity of COVID-19, its many damaging side-effects, its impact on health services and the possibility that the mortality rate will rise again in the Autumn along with the case load. On the other hand, the SLAACers have thrown all caution to the wind in regard to the long term health of the nation, and have massively privileged COVID-19 suffers over those who suffer from other deadly diseases. It is quite possible in the longer run, for example, that for every life saved from COVID-19 through prolonged lockdowns other lives will be lost to different diseases due to the ongoing curtailment of the health service and that in the end COVID-19 may prove unstoppable anyway (which was the view of the chief medical officer in Sweden). Very little analysis of the healthcare economics relating to our current situation appears to be taking place, perhaps because there are no political brownie points on either side for that type of work, with the grim trade-offs that it requires. Without this, however, it will be impossible to make wise policy choices in the coming months. This is all to say that working out what happens next is unusually difficult. What is clearer, however, is that in response to the lockdowns governments in developed markets around the world have issued a quantity of money the like of which has not been seen since the 1940s in the midst of World War II. Like the virus, opinions are widely scattered about the implications of this. Many economists are assuming that this is just a larger version of what happened after the Great Financial Crisis, and that it should both be manageable and effective, with little impact on inflation. The rising gold price is being seen by this group as merely a bubble. For others, most notably Tim Congdon, perhaps the most active proponent of Milton Friedman style monetarism in the UK, it is impossible to create this much money without giving rise to significant inflation once the velocity of transactions returns to normal in the economy after the lockdowns. I find Tim Congdon's argument compelling, and believe that the early evidence for an inflationary outcome is already apparent in stock markets around the world, which have risen much faster than many expected, as well as the soaring gold price. One definition of stagflation is that it is caused when government policy simultaneously stimulates and slows down the economy, giving rise to both a recession and inflation at the same time. This is precisely what happened during the 3 month lockdown of Q2 2020. When the lockdown ends, there is going to be a choice to be made between austerity and inflation. It seems pretty clear which one is likely to win.

TB Amati UK Smaller Companies Fund

The TB Amati Smaller Companies fund rose 2.9% in July, slightly ahead of the benchmark which rose 2.3%. This brings our year to date performance to -12.0%, against a benchmark return of -17.9%.

The star performer during the month was Synairgen. This was a company that Amati AIM VCT helped finance in March to fund two placebo controlled trials of its inhaled formulation of Inteferon Beta for use in COVID-19 patients. On 20 July the first trial data was reported by the company, showing some spectacular results in what was admittedly a small scale trial, indicating that patients who received their drug had a 79% lower risk of developing severe disease compared to placebo. Recognising the far reaching potential significance of this news we bought a small holding for the fund at the market open, and by the end of the day the shares had pretty much doubled in value. The next biggest contributor in July was Gear4Music, the online retailer of musical instruments and related equipment. Having produced strong results in June, the company gave a Q1 trading update in July covering the 3 months to end of June showing organic growth in sales of 68%, which caused a further sharp rise in the shares. Elsewhere the fund's healthcare related holdings continued to perform strongly, energy stocks continued to rebound, and some niche international industrials like DiscoverIE and Spirent did well. The biggest negative contributor was Dart Group, owner of Jet2, which gave up prior month gains in the light of complex quarantine arrangements being imposed on UK travellers abroad.

Besides Synairgen, we bought new holdings in CMC Markets, the financial trading platform, Codemasters, video games developer specialising in racing games, and Eqtec, one of the leading providers of gasification technology, which we see being able to play a valuable role in transitioning energy generation away from fossil fuels. Sales included development and construction companies, Watkin Jones and Redrow.


The VCT performed strongly during the month, with a NAV Total Return of 5.9%, which compares to a rise of 0.6% of the Numis Alternative Markets Total Return Index. The biggest contributor was Synairgen, a company which the VCT backed in March, helping to fund two placebo controlled trials of its inhaled formulation of Inteferon Beta for use in COVID-19 patients. On 20 th July the first trial data was reported by the company, showing some spectacular results in what was admittedly a small scale trial, indicating that patients who received their drug had a 79% lower risk of developing severe disease compared to placebo. The shares rose over 400% during the month, recognising that this drug could be of very significant international interest. We are awaiting news of what next steps are agreed with regulators. The next two largest contributors were also companies in which additional investments had been made earlier this year, Polarean, which has developed a next generation lung imaging technology, and Diurnal, a company developing and marketing drugs for chronic endocrine (hormonal) diseases. It should perhaps come as little surprise that this is one of the best environments for healthcare stocks in the UK market for many years, and the VCT's record 28% weighting in this sector is proving well placed. On the negative side Hardide fell sharply after reporting that having initially seen little impact from COVID-19 on its business, order book delays were now appearing, and lower demand should be expected for the remainder of the year.