Global Markets to 22nd March 2020
After another tough week for clients and staff alike, we would like to thank you all for your patience and support. Our advisers are doing their very best to make sure that we have continued and regular contact with you.
Following Petronella’s message last Monday, I am writing to confirm that IQ is now operating from remote locations and has put in place effective systems for managing phone calls and post – particularly important given just how close we are to the tax year end. We are keen to ensure strict adherence to government guidelines, and the protection of our staff and our clients is of paramount importance.
Our key platform providers – 7IM and Transact – are also continuing to offer their full range of services.
We are also keen to ensure that all tax year end planning is completed. Remember that it is not too late to make a last-minute ISA or pension contribution. Please rest assured that we continue to give a great deal of thought when making new investments for our clients. When we feel there is value to be had, we trade accordingly. It is worth bearing in mind that we are long-term investors, that we know that you have clear financial plans in place and that – where necessary – we are holding overweight cash positions.
The IQ investment team continue to undertake extensive research and analysis on the markets as a whole, as well as on our investment strategies in light of the economic backdrop.
We continue to advise our clients to maintain their current course and remain invested. Our full board of directors is on hand to ensure that we continue to monitor the situation closely, and that we act accordingly.
Now let’s take a look at the events of the week.
- Another frantic week for financial markets as the coronavirus spreads to more countries and the number of fatalities rises.
- Further action is taken around the world to bring the situation under control by implementing polices to curb the spread of the virus and stabilise the markets.
- Measures are announced to contain the virus and an unprecedented raft of measures are unveiled to prevent devastation to the British economy.
- US and UK central banks announce further interest rate cuts and other stimulus measures to keep the markets liquid.
- While the US dollar strengthens, sterling collapses to levels last seen in the 1980s as UK interest rates are cut to an all-time low.
- Our base case is that although the financial markets might fall lower, equity markets are cheap and any positive signs will result in a dramatic rally in share prices.
Global Market Summary
After yet another frantic and – at times – unsettling week for the financial markets, we probably deserve some reprieve from all of the dramatic and tragic news associated with COVID-19. But we must try to make sense of this crisis – the world seems to have entered a lengthy period of closures and lockdowns that will create an economic meltdown the likes of which have not seen since the last financial crisis more than a decade ago.
The pandemic has shaken the whole world. Government and central bank policies are now meshing together in a bid to save lives, enable countries’ vital healthcare systems to cope and continue to operate, and to try and stabilise the financial markets as they lurch anxiously from one direction to the next, in response to non-stop rolling news.
Leading central banks around the world – the US Federal Reserve Bank, the Bank of England and the European Central Bank – have implemented speedy and impressive monetary measures to keep the markets liquid and to help many millions of employers and employees work remotely.
Many companies are experiencing cash flow problems, and this is likely to lead to cost-cutting and staff reductions. In the UK alone, more than 200,000 people previously employed in the leisure and hospitality industries have lost their jobs. Indeed, a very early poll conducted in the US showed that 18% of adults had either had their working hours cut or had been laid off altogether.
Many governments are already anxious about a potential steep rise in unemployment. In response to this anxiety, Chancellor of the Exchequer Rishi Sunak announced one of the world’s most comprehensive emergency packages on Friday – an unprecedented raft of measures to prevent devastation to the UK economy.
While Prime Minister Boris Johnson called for a significant acceleration in the country’s response to the virus – ordering the immediate closure of all pubs, restaurants, theatres, cinemas, nightclubs, gyms and leisure centres –, the Chancellor announced radical plans whereby the state would pay up to 80% of employees’ salaries, or up to £2500 per month for an initial three months to those who had been laid off rather than made redundant.
He also announced the deferral of VAT payments by companies until the end of June, while offering cash grants for small businesses and help for the self-employed, renters and the unemployed. Although these measures constitute the furthest-reaching state intervention the country has seen since World War II, given how vital it is that we maintain short-term cash flow to businesses and individuals as the pandemic builds up to a peak, they are unlikely to be the last.
These are difficult times for everyone, and the economic impact can already be seen in newly-released economic data. But it will be over the coming months that we will see the true financial distress that the coronavirus has had on human life, and on our industries and businesses.
Needless to say, the market situation looks somewhat bleak: the MSCI World Index and our leading domestic market – the UK’s FTSE 100 – are both down by 30% for the year thus far, following double-digit falls last week.
Market capitulation across the globe is resulting in similar falls: some of the more exotic regional markets have corrected by over 40% since the beginning of the year. The recent collapse in the oil price has also dragged risk assets lower. Simmering differences between Saudi Arabia and Russia over oil production have sent prices plummeting by over 50% this year. The situation has been exacerbated by China (the world’s largest oil importer) reducing its shipments due to the coronavirus and concerns over its slowing economic growth.
In the foreign currency markets, sterling hit its lowest level since the 1980s after new Bank of England Governor Andrew Bailey announced that interest rates were to be cut to an all-time low of 0.1% and that its quantitative easing programme was to be increased by £200 billion through further buying of UK government and corporate bonds. This is designed to hold down the cost of borrowing while pumping further cash into the economy. The pound did, admittedly, recover some of its lost ground following the Chancellor’s well-received speech and after details of his new support package were announced.
In the US, the Federal Reserve Bank announced its second emergency response to the pandemic, lowering its Fed funds rate range to 0%-0.25% – its second rate cut in less than two weeks. Furthermore, it has accelerated its purchases of mortgage-backed-securities to try and calm the market after American home loan rates began to rise
Unfortunately, the Fed’s monetary responses have not been able to hold back the US dollar, which has gained further ground against a basket of leading global currencies. The dollar’s strength appears to have its roots in powerful short covering as global investors seek the benefits of holding the world’s reserve currency as a safe-haven strategy in difficult times.
In Europe, the ECB unveiled a further €750 billion emergency bond plan to try and avert an immediate EU-wide economic crisis. However, although the ECB’s announcement has helped the bond markets, it has done very little to support the euro.
Once again, these announcements from the leading central banks are likely to be followed by further monetary assistance if the coronavirus crisis worsens over the coming weeks or – as we expect – the global economy weakens further (it is fairly likely that many countries are already in recession).
In the commodity markets, the price of gold has been drifting back. But this weakness might be short-lived, given the threat of further coronavirus-related uncertainty. Further fatalities and rising unemployment could see more people turn to the yellow metal – given its natural safe-haven attributes in times of disorder in the equity markets.
Overall, governments and central banks around the world are creating a supportive monetary and fiscal backdrop to mitigate the ramifications of the coronavirus, and its up to the public to play its part by taking advice from them and medical professionals.
Unfortunately, from an investment perspective, no-one can provide definitive answers in response to questions about how low the markets might fall from here. Our base case is that the markets will remain volatile while contagion levels remain elevated. But if the number of coronavirus cases were to peak and then fall, allowing workers to return to more normal conditions, then this would be a positive for investor sentiment.
Any signs of the virus being brought under control and of fatality numbers falling would lead to a dramatic rally in share prices. But we already have at least one quarter – possibly two quarters – of rather depressed corporate earnings numbers and downgrades from company guidance statements to digests, and, of course, a recession.
Needless to say, positives to look out for include a falling of coronavirus case numbers, a relaxation of government controls, early green shoots of recovery in economic data and eventually a vaccine (which may come sooner than the market is perhaps anticipating).
However, the longer-term impacts will include changes to how businesses trade throughout the world and how they re-structure their employment methods: remote working solutions such as Slack, Microsoft Teams, Zoom and Discord have become invaluable to help staff and companies to communicate efficiently outside of their normal working offices in cities around the world.
There can be no question of life not returning to normal. But this pandemic has made governments, central banks, companies and individuals eminently aware of just how possible it is for the world to experience widespread dysfunction, and for that dysfunction to go hand-in-hand with the most terrible loss of all: people’s lives.
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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