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Global Markets to 20th April 2020

 

Highlights

  • Global equity markets register their second week of gains, despite some awful economic data and corporate earnings reports.
  • Year-on-year, China’s economy shrinks for the first time in four decades. But shops, restaurants and some small businesses are beginning to reopen (with safety measures in place).
  • Early indications that the pandemic might be peaking in certain regions – Europe and perhaps even the US – are encouraging. But the UK sees a three-week extension to its lockdown.
  • Californian-based biopharmaceutical company Gilead Sciences is reported to have had some success with coronavirus patients using a drug called remdesivir, while Swiss pharma group Roche is launching a coronavirus antibody test.
  • Getting the world back to work after such a destructive pandemic is extremely challenging: we are likely to see major changes to how we live and work, and in the way in which we use smart technology.
  • The global equity markets appear to have experienced a relief rally, proving the old adage that the trend is your friend. Needless to say, however, caution should still prevail.

Global Market Summary

This week saw the announcement of some awful economic data. The world’s second largest economy – China – has shrunk for the first time in four decades; about 14% of US labour workers have lost their jobs over the last month; and the International Monetary Fund expects the global economy to shrink by 3% this year. And yet… global equity markets registered their second week of gains.

Furthermore, over a third of the world’s population is still under restrictive lockdown – indeed, the UK government has just announced a further three-week restriction and there is every likelihood that this could be extended until June.

Nevertheless, with the financial markets being supported by governments and action from central banks, optimism has flooded back into risk assets (such as equities), leading to a very impressive rally which has been underway since 23 March 2020, when they bottomed out. This is quite common in the midst of a bear market and it is worth bearing in mind that there is still enough bad news around to knock the wind out of this recent rally. Some restraint is therefore required.

Over the coming weeks, a rise in insolvencies, a collapse in corporate profitability and further job losses are all likely to tarnish this recent stock market euphoria. COVID-19 is likely to result in a further series of sell-offs – which may even test those March lows – followed by some impressive rallies.

Early indications that the coronavirus outbreak might be peaking in certain regions (Europe and perhaps even the US) are encouraging. And suggestions of easing fatality and infection rates in countries such as Italy give some grounds for cautious optimism. But given that the virus is still in the process of spreading to other countries worldwide, this is not the time for complacency.

What this bear market rally has provided, however, is an opportunity to re-evaluate asset allocations and portfolios to make sure that equities held for the longer term are of the highest quality. This is because many over-leveraged companies are likely to face further difficulties in the future.

Coronavirus is not just the biggest health crisis the world has faced for decades: it has also triggered a restructuring of the global economic order. Over the coming years, we are likely to see a dramatic restructuring of the economic and social backdrop. Businesses will make radical modifications to how they work, and people will completely change how they spend their free time.

This pandemic which has shut down workforces all over the world and demanded the most expansive monetary and fiscal responses by governments and central banks… this pandemic which has caused the sharpest collapse in the global economy since the Great Depression, will undoubtedly catalyse a rush to develop more disruptive technologies and advanced healthcare solutions for finding vaccines to safeguard our lives and protect our livelihoods.

Getting the world back to work after such a destructive pandemic will be extremely challenging. Most industries will need to reactivate their entire supply chain – something which might prove difficult, given the pre-virus trade war that was raging between the US, China and – to a lesser extent – Europe.

The lockdown has also resulted in a monumental increase in the numbers of people working from home. This has resulted in some creative comments from some of the leading global businesses – the investment banks in particular…

E-commerce, contactless payment options at food outlets, extensive use of media services during leisure time… these have all helped contain the virus during the lockdown period by enabling social distancing rules to be adhered to.

These shifts and their impacts on how we live, how we work and how we use technology have all been heightened in recent weeks: indeed, millions more people have taken the leap and started to use smart technologies in their daily lives.

The shocking fatality rate of COVID-19 will also change the way society evaluates its level of preparedness for such an event. Leading governments and administrations around the world will need to address multiple healthcare issues and hasten the roll-out of new telemedicine and telehealth technologies; they will need to fast-track robotic solutions testing and ensure that there are acceptable supplies of ventilators and other critical medical devices. Resources for scaling up vaccine production will also need to be made available.

In many respects, a pandemic is just like any other humanitarian crisis insofar as it creates upheaval, uncertainty and economic disruption, as well as resulting in high fatality rates which are deemed unacceptable in the 21st century.

Developments on last week’s markets provided clear evidence that bad news can be good news, while good news gave an additional adrenaline boost for risk assets. While much uncertainty remains, investors appear to be looking beyond this year and into next – which is a brave call.

On Thursday, news broke that Californian-based biopharmaceutical company Gilead Sciences had had some success with coronavirus patients at University of Chicago hospital using a drug called remdesivir. According to reports, 125 patients with COVID-19 – including 113 with a severe form of the virus – took part in two “phase 3” clinical trials. These trials normally come at a later stage in the development of a drug and are seen as a final hurdle before any regulatory approval can be given. In Europe, Swiss pharma group Roche announced the launch of a coronavirus antibody test, to be available next month.

Although, this does not mean we are any closer to finding an actual vaccine, it is reassuring to know that many major companies are working tirelessly to develop a treatment or vaccine against the virus.

In Asia, news that China’s economy had shrunk by 6.8% year-on-year in the first quarter was painful – this was its first contraction since 1976. On the same day, the Chinese authorities began to relax the 77-day quarantine on Wuhan – the city that supposedly exported the coronavirus across China and then the rest of the world.

At the end of March, large Chinese companies started recalling their workers, while some shopping malls and restaurants reopened (against a backdrop of safety precautions). Although this is good news, a second wave of the virus remains a possibility in China.

Elsewhere, the flurry of recent-released global economic data is decidedly gloomy. But this was to be expected, along with generally weaker first-quarter corporate earnings. Nevertheless, some sectors – such as online retail – have seen significant growth. Amazon, for example, is seeing more people sign up to its “Amazon Prime” service, securing regular payments for the e-commerce giant and the likelihood that once the shopping malls do reopen, there are no guarantees that these new customers will return to the high street.

In the commodity markets, the price of crude oil dipped below US$18 a barrel – its lowest level since 2002 – as energy markets struggle to absorb the global oil surplus created by the coronavirus. With up to a third of global consumption now lost to the measures announced by governments to try to curb the pandemic, the short-term likelihood of any meaningful bounce in the price seems low.

Conversely, the price of gold bullion has been rising steadily: investors have used the yellow metal as a safe-haven asset class in times of higher stock market volatility and equity market sell-offs. Its value recently reached its highest level since 2012, before some profit-taking saw the price drift back.

We expect the global equity markets to remain unpredictable over the coming weeks, buffeted by further pandemic-related developments and continuing weaker economic news. The global equity markets appear to have had some respite or experienced a relief rally, proving the old adage that the trend is indeed your friend.


Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us via email. We would love to hear from you.

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