Global Markets to 6th April 2020
- The last two months have been a rollercoaster ride for financial markets and global investors: euphoria at the start of the year has given way to despair
- Data released over the coming weeks will show just how severe the effects of coronavirus will have been on the global economy.
- Downgrades on corporate credit ratings have been dramatic, while in the UK suspended dividends to preserve cash on company balance sheets are bad news for income seekers.
- In the meantime, governments and central banks announce more measures to try and stabilise the situation. This “whatever it takes” approach is likely to continue.
- The MSCI World Index rises by over 10% in the last couple of weeks. This is, however, to be expected following such a severe correction that has seen many global equity markets down by a third from their recent highs.
- The pandemic has crushed the global economy and pushed it into its biggest decline since the Great Depression. But a swift recovery could come over the coming months; or better still… the announcement that a vaccine is on its way.
Global Market Summary
The last two months have been a rollercoaster ride for financial markets and global investors: euphoria at the start of the year has given way to despair as we move into the second quarter. Coronavirus (Covid-19) has ravaged the planet, leaving a wake of economic disruption in its path, together with spiralling numbers of fatalities.
With most of the world on lockdown, a squeeze on business cash flow and individuals’ earning capacity has created intense financial uncertainty, constituting an “unknown unknown”.
Recent data released in the US has shown a significant rise in unemployment: nearly 10 million have registered for unemployment benefit in the last two weeks alone, and an overloaded system has prevented numerous others from submitting their claims. This is likely to get much worse: Goldman Sachs predicts that unemployment in the world’s largest economy could hit 15% over this quarter.
Similarly, unemployment in the UK could double over the next few months – many of workforces operating in consumer sectors, such as travel, leisure and of course the high street will remain badly affected as their customers remain at home. However, there has been something of an increase in online spending, benefiting those businesses which have the relevant technological capabilities.
Although the government’s attempt to incentivise employers to keep their staff on is a positive move, doing so might become harder if the pandemic eases before returning with a vengeance later on in the year.
The spectre of a second wave is something about which the medical authorities are extremely concerned. We therefore echo the government’s advice and reiterate just how important it is that people play their part in containing the virus by staying at home.
The economic fallout from the coronavirus is expected to be severe. Indeed, news headlines around the world detail economists’ predictions of its severity on a daily basis. Furthermore, they are now joining credit ratings agencies in downgrading growth predictions as a deep global recession starts to look increasingly likely.
Similarly, these agencies have also downgraded corporate credit ratings at the fastest rate on record, while in the UK, many companies have decided to cut or totally scrap their dividend payments to shareholders in a bid to preserve cash on their balance sheets throughout the crisis. This will make it difficult to generate the levels of UK income that were available pre-virus; UK income is therefore expected to fall sharply throughout the rest of this year.
Consequently, holding global diversified portfolios mitigates some of that risk. But it still depends on the underlying companies held within a given portfolio, and this why our investment process is focussed on quality growth. For those investors who rely on pension drawdowns or regular income distributions to top up their incomes, these are going to be stressful and uncertain times.
More widely, the pandemic is clearly going to have a significant impact on global GDP – perhaps of a level unlike anything we have seen in half a century, triggering the deepest recession since the Second World War. Worth considering, however, is the fact this crisis differs greatly from others insofar it has been “artificially” created by leading government administrations telling people to stay at home.
We therefore need to wait and see what happens when those restrictions are lifted, and workforces are able to return to full production. It has been reported that millions of Chinese workers have cautiously gone back to work in factories, shops and offices, but still face anti-coronavirus controls. These are unprecedented circumstances and a return to normality is likely to take time.
In the meantime, governments and central banks will continue to announce measures to try and stabilise the situation. The leading central banks have cut interest rates, and many have restarted their quantitative easing programmes. Governments are actively trying to help businesses, keeping the number of bankruptcies to a minimum. They are also trying to help employers to retain their workforces in a bid to contain the rise in unemployment.
While it is impossible to predict the ultimate scale of the devastation on the global economy that the coronavirus will wreak, we will see some insights in the coming weeks as further global economic and corporate data becomes available. However, what is clear is that the financial markets have already braced themselves for the worst and have given up over a third of their gains since their recent peaks.
If the world economy is to experience a “V”-shaped recovery, meaning a sharp fall – which we have already had – followed by a significant rally, then this should be evident over the next few months. Indeed, it looks as though the bottom was reached on 23 March 2020 – the MSCI World Index has gained just over 10% since that date.
Unfortunately, however it is still too early to say for sure whether we have seen the bottom, given the expected bad news regarding the first quarter corporate earnings season, which is about to start. There is also a distinct possibility that we will experience a second wave of coronavirus, in which case we would likely see a double dip, or a “W”-shaped recovery.
Wall Street did indeed end the most recent five-day trading period lower following the release of those terrible jobs numbers, with leisure and hospitality, followed by healthcare and social assistance being the hardest hit sectors. Unfortunately, the US is likely to see further job losses and many more fatalities – the virus has only recently begun to ravage the country.
European bourses also fell following the release of some disheartening survey data, underlining the huge cost of the lockdowns across the continent. The IHS Markit eurozone purchasing managers’ index for services plunged to 26.4 in March, down from 52.6 in February – the lowest since records began in 1998.
In commodities, the price of oil rose by nearly 50% for its biggest ever one-day rise after President Donald Trump, Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin held talks to try and agree to curb production. Although there are still significant obstacles ahead, all parties are optimistic about a positive outcome to these talks.
What the world clearly needs now is some good news. And as the weeks pass, the likelihood of a vaccine being made available will increase. But in the meantime, regarding the investment backdrop, we remain committed to holding quality assets – given that higher levels of insolvencies are inevitable.
Although we have seen the financial markets move up over the past two weeks, it is still too early to start calling the bottom. Indeed, it would be a big mistake to become overconfident or animated. Even if you miss the first five or ten percent of any sustainable recovery, that’s still better than jumping the gun and throwing caution to the wind. Remember – this economic crisis is the result of a health crisis, not a financial crisis. So, any signs of a global economic recovery will be far harder to predict… not unlike the coronavirus itself.
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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