Global Markets to 2nd March 2020
- Global stock markets aggressively correct as the coronavirus spreads throughout the world and US Treasury yields hit all-time lows as global investors seek safe-haven asset classes
- Brent crude oil prices continue to fall, while the fear gauge index climbs to its highest level since 2018
- Governments, central banks and leading authorities are likely to announce further measures to mitigate the effects of the COVID-19 virus on the global economy
- The head of the World Health Organisation tells CNBC that the global markets need to calm down and that irrationality does not help
- This is a worrying time and we encourage investors to remain focussed on their objectives. We continue to implement our long-term and well-established investment process. Although we cannot predict the overall short-term impact of the virus, we continue to believe that equities look cheap compared with sovereign bonds
- During these turbulent times, we remain vigilant and encourage clients to remember the words of Warren Buffet: “Risk comes from not knowing what you’re doing”
Global Market Summary
In light of last week’s extreme stock market volatility and the global impact of the coronavirus (COVID-19), we would like to use this edition of the Lowdown to reassure our clients and readers. This virus is admittedly affecting people, businesses, countries, stock markets and personal portfolios, but we nevertheless believe that a calm approach underpinned by sensible decision-making will be rewarded over time, ensuring that you meet your individual long-term investment objectives.
The media will doubtless continue to report on the virus and market movements on a daily basis. But, as WHO director-general Tedros Adhanom Ghebreyesus told CNBC this week, “global markets [need to] calm down and try to see the reality […]. We need to continue to be rational”, he went on to say. “Irrationality doesn’t help. We need to deal with the facts”.
There is growing concern that the situation could evolve into a pandemic: it has already spread to sixty countries, infecting around 86,000 people. About 3000 have died. It goes without saying – but shall be said nonetheless – that our thoughts are with those who have lost loved ones.
Containment is evidently the only way to tackle the coronavirus. But the corollary of containment is cancelled conferences, postponed events, suspended personal and business travel and a dramatic fall in the volumes of manufactured goods being imported and exported. In China alone, the country’s workforce essentially downing its tools and ceasing manufacturing is highly problematic: China accounts for just over 30% of the world’s GDP growth.
Airlines, travel businesses and luxury goods companies have been hit the hardest by the virus, while the price of crude oil has collapsed. Global trade consumers such as China and Japan – both huge buyers of commodities and energy – are at a virtual standstill.
However, the stringent quarantine measures that the Chinese authorities have put in place have resulted in the daily increases in the number of infected people in that region starting to fall since mid-February. And after a month of imposing these successful measures, local authorities are reluctant to lift them. Although this will affect China’s GDP growth forecast, the news was greeted very positively by the World Health Organisation. Unfortunately, however, anxieties over the virus have now spread to countries outside China and Asia, including much of Europe, the US and even the UK.
A history of the world’s worst viruses and pandemics tells us that they are rare occurrences. It is therefore somewhat surprising that a virus such as COVID-19 could be having such a harmful effect on financial assets and global stock markets. This latest epidemic triggered history’s fastest ever correction on Wall Street, with one chief market economist quoted as saying “it’s now Wall Street versus the coronavirus”.
There is no doubt that the past couple of weeks have seen panic in the markets as investors have scrambled out of global equities and into sovereign bonds, sending the US benchmark 10-year Treasury bond yield to below 1.12% for the first time ever. And over the past week, we have seen the Dow Jones and S&P 500 indices retreat by 12% and 11% respectively.
A similar pattern of events has played out elsewhere, with severe capitulation over the last few trading days. For the seventh consecutive day, the FTSE All-World Index tumbled, taking its weekly fall to 10%, while numerous authorities and tangible companies have announced measures to try and contain the virus.
Cautiousness and anxiety have engulfed the global investor, while analysts are now trying to predict the effects that the outbreak might have on economic data and corporate earnings profitability going forward. Goldman Sachs has already said that the coronavirus would reduce earnings growth in US companies to zero this year, going on to indicate that the trajectory that both the US and the global economy is on is highly uncertain at this time.
The leading central banks around the world will doubtless try to avoid too sharp a global economic slowdown or even a recession by announcing further interest rate cuts. But with rates already so low, there are questions about how effective such a move would be. Fiscal policy and government spending are likely measures for readjusting any GDP weakness.
The People’s Bank of China has slightly cut interest rates, while making cash available through bank lending facilities to the business sector. The Bank of Japan and the European Central Bank are continuing with their programmes of quantitative easing – initiated before the crisis – while the Federal Reserve Bank has been keeping markets liquid since late last year.
Over the weekend, US President Donald Trump criticised his central bank for not acting more swiftly to combat a virus-induced economic slowdown. He said that the Fed should start being a leader, that the US should have the lowest interest rates and that it should refinance its debt. However, some economists have expressed concern over that last comment: it could have unintended consequences for the country’s finances.
In response, Fed chair Jerome Powell said he believes that the fundamentals of the US economy remain strong. However, he conceded that the coronavirus did pose evolving risks to economic activity and that the Fed was closely monitoring developments and implications for the economic outlook. The Fed obviously has room to cut interest rates further… but what we really need is a coronavirus vaccine.
In the UK, leading stock market indices were down over the week, much in line with those of the US and Europe. Outgoing Bank of England governor Mark Carney said that the COVID-19 outbreak would hurt economic growth, but that the impact was difficult to quantify.
And on the forgotten subject of Brexit, the government has released its negotiating objectives for the next phase of discussions with the European Union, with details of the levels of cooperation that it expects from its European counterparts. There is manifestly much work to be done to realign both sides in pursuit of a friendly and constructive agreement.
Unfortunately, we cannot predict the overall short-term impact or outcome that the coronavirus will have or how far it might spread. But what we are doing is continuing to adhere to our long-term and established investment process, which currently tells us that equities are cheap compared with sovereign bonds and deliver superior returns over the longer term.
The “unknown unknowns” can sometimes be tragic events that result in both fatalities and financial disruption, impacting individuals, personal pensions and other investments. But we believe that this creates opportunities for better returns when markets stabilise, driven by meaningful fundamentals.
We will therefore be looking for further investment opportunities as the weeks and months pass, sharing information and updates with our clients on an ongoing basis throughout this stressful time.
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.
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