Global Markets to 27th April 2020
- Financial markets are dominated by the unprecedented collapse in the crude oil price as the May contract for physical deliveries collapses, sapped by a total lack of global demand.
- As long as the majority of the world remains in lockdown, any change in oil prices remains unlikely, while the world’s onshore and offshore storage tanks are already at capacity.
- The recent strong recovery in global stock markets leaves many market watchers perplexed. Recent economic data is worse than initially anticipated, eliciting grave warnings from the International Monetary Fund.
- The markets’ recent euphoria can be attributed to two factors: the Federal Reserve Bank’s “whatever it takes” approach and the resilience of the tech sector.
- Technologies are being used across generations to bring families together, meaning new subscribers for many services and providers.
- While there is still risk in the global equity markets, this is the time to be bold and buy quality and innovation in pursuit of long-term gains.
- The IQ team were proud to take part in the 2.6 challenge over the weekend, raising money for the charity Street Child. Please visit our Just Giving page to read more about this and donate to a worthy cause: https://www.justgiving.com/fundraising/investmentquorum
Global Market Summary
Last week’s financial markets were dominated by the unprecedented collapse in the price of crude oil: the May contract for physical deliveries of West Texas Intermediate (the grade of crude used as a benchmark in oil pricing) plunged into negative territory. A couple of months ago, such a vertiginous collapse would have been unthinkable. But the coronavirus pandemic has bled away as much of a third of global demand for oil.
Oil producers have stubbornly continued to pump oil out of the ground, despite the almost complete halt in global travel, meaning that there is now simply nowhere to store the stuff. The refineries don’t want it… and the world’s storage tanks – both onshore and offshore – are literally overflowing.
As long as the world remains in lockdown, oil demand is not expected to recover any time soon. This means a great deal of uncertainty in relation to the commodity, as well as – of course – serious ramifications for the leading global oil companies, which will soon be forced to turn off the taps. The situation is likely to be more serious for US companies – extracting shale oil is significantly more expensive.
Perhaps more concerning is that these companies typically have more debt on their balance sheets. The result could be a ripple effect throughout the broader financial system as higher-level defaults and insolvencies become unavoidable.
More widely, the divergence between the recent stock market recovery and the dying economy is leaving many economists and analysts perplexed. The recent economic data reflecting life under lockdown and the pandemic has evidently been worse than anticipated, provoking the IMF to forecast the worst global recession since the Great Depression of the 1930s.
And yet, since they bottomed out on 23 March 2020, the stock markets have been rallying. Their rise has cancelled out half of their fall since late February, signifying that technically, the MSCI World Index has now entered a new bull market phase.
Two factors appear to be assisting this new bullish euphoria in the stock markets. Firstly, the announcement of the Federal Reserve Bank’s stimulus packages – twice the size of the packages announced at the peak of the 2008-2009 financial crisis – and secondly, the technology rally, reminding us all that this sector now accounts for a significant spread of Wall Street indices.
Overall, central banks have been highly proactive in their response to the crisis: the Federal Reserve Bank stated that it would do “whatever it takes” to combat the virus. But according to the IMF, the final bill is likely to be around US$14 trillion, meaning that all economies will be carrying considerably higher levels of debt over the coming years.
In the meantime, however, risk assets have been responding positively to bad news. Indeed, after a collapse such as the one seen last month, a bottoming-out followed by a change in sentiment as buyers return is a well-established pattern. Such rallies can be aggressive, but caution should still be exercised: history has shown that previous lows can still be retested, but provided the original low holds, it will generally go on to form the baseline for the next bull market.
In previous financial crises, such rises and falls in equity markets – testing previous lows – have been known to catch out enthusiastic investors. This is obviously a health crisis, and not – as yet – a financial one. This means that the outcome might be different and the recovery pathway more rewarding, since we are likely to benefit from a very different investment theme.
Silver surfers, for example, have learned how to use Zoom as communications technologies have been embraced by people of all generations. The lockdown has created a dramatic increase in the numbers of older people subscribing to technology and using media-driven devices so that millions of families can communicate with their loved ones. Online shopping and banking and home delivery services have seen significant increases in usage, while many businesses have had to learn how to run more efficiently from their new remote home offices.
Once this crisis is over, it is highly likely that many of the major changes that people of all ages have recently made in their lives will remain in place. This will further benefit the technology and media Goliaths, as well as new inspirational companies – such as Zoom, which is set to join the NASDAQ 100 Index on Wall Street at the end of April.
And on the subject of the NASDAQ, last week the value of those quoted companies outpaced the value of all companies in the world index, excluding the US. Unlike past financial crises, the US’ dominance in technology has made a significant difference to investment outcomes: these pioneering technology and digital businesses are revolutionising the way in which individuals and businesses go about their daily routines.
Unfortunately, Covid-19 is likely to sound the death knell for many more businesses before this crisis is over. In the US alone, the unemployment rate has skyrocketed, taking the total to over 26 million – 16% of the labour force. California appears to be the hardest hit, with the most number of claims.
With further job losses predicted, weaker purchasing manufacturing index numbers and poorer earnings forecast, it would be rather imprudent to think that the markets can keep rallying in a straight line without an occasional pull-back or even a flash crash.
However, the Covid-19 crisis will provide some excellent opportunities as companies begin to map out their business models so as to cope with the changing world of more debt, less globalisation and greater digitalisation.
Sectors such as healthcare will benefit from further funding (to help them develop vaccines faster, for example), while healthcare providers are already moving more rapidly into telehealth and insurers into self-service claims assessments. Similarly, in the retail sector a further increase in contactless shopping and home deliveries is almost certain.
As far as the global consumer is concerned, it is far too early to know whether they will spend their money differently once the lockdown starts to be relaxed. There is every possibility that travel, eating out and socialising habits will undergo some sort of change. Nevertheless, it is already clear that leading innovation businesses are already benefiting from changes in consumer behaviour, adding to their subscriber bases and increasing their market share.
This is a time to be bold and leverage innovation and the longer-term demographic changes that are already making themselves felt. Microsoft co-founder Bill Gates once said “the advance of technology is based on making it fit in so that you don’t really even notice it, so it’s part of everyday life”. How true that has proved to be in recent weeks.
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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