Market Update April 2020: Plotting a Path for Recovery
This week may have been a short week for many but there was no shortage of data to digest as a number of positive news stories started to appear through the Covid-19 haze that has consumed markets in recent times.
Whilst the number of deaths continues to rise, the rate of infection in Italy, Spain and Germany appear to be slowing giving hope that the peak may have been reached in areas that had previously been dubbed the epicentre of the virus within Europe. Whilst daily death toll reports from China have been met with wide spread scepticism, markets seem to have taken solace as the light at the end of the covid-19 tunnel appears to be shining slightly brighter.
The financial impact of the virus is expected to outlast the virus itself with the Fed and the EuroGroup, formed of 29 members of the eurozone, continued to ramp up support for small businesses. Despite the positive policy action in the US, the startling unemployment figures that show 22 million US residents have filed for unemployment benefits in the last 4 weeks could not be ignored.
Aside from the covid-19 pandemic, the markets reacted to the latest Opec+ meeting who met in an attempt to stabilise the oil price in the face of excess oil inventories caused by a dampening of demand globally. The cartel agreed to cut production by 9.7m barrels a day in May and June, equivalent to almost 10 per cent of global supply. Whilst markets initially reacted positively to the news, the positivity was short-lived as the latest inventory data released from the US showed that the agreed level of cuts are unlikely to go far enough. The latest figures from the US showed oil inventories of 19.2 million barrels are currently being held, up from 1.6 million barrels just 4 weeks ago.
Although volatility remains at elevated levels, the markets have shown appreciation for the positive action from central banks alongside other occasional snippets of good news. This has encouraged a risk-on environment over the last week with some significant upward moves in both equity and credit markets.
Last week, Global equities had their strongest week (+10%) since 2008, but the real standout in Developed Markets was the performance of the FTSE 250 (UK Midcaps), which rose 16.3%, the biggest weekly gain since index data became available in 1986. Global small caps had a record week too rising over 14%.
As I write, the FTSE 100 looks set to finish the week on a strong note, currently up over 2% as the incremental easing of lockdowns in Germany, Spain, Austria and Italy provided some cause for cautious optimism, as did the revelation that one of the world’s leading biotech companies claims to have found an effective COVID-19 treatment. Reports overnight suggest Gilead’s drug Remdesivir has helped the rapid recovery in fever and respiratory symptoms for 125 patients.
As always, it’s important we try to put the recent news into context to help us understand whether our financial plans are on track. These glimmers of hope are welcomed, but we also appreciate that there is a long way to go and the duration and severity of the virus and subsequent lockdown measures in both the UK and across the globe are still unknown. It’s reasonably accepted that markets may still need to price in further downgrades to company earnings if the lockdown extends and therefore when adding this onto the already bleak outlook for GDP in Q2, we continue to expect a bumpy ride in the coming months for equities.
In a study by J.P.Morgan this week they plotted three possible outcomes for the US economy based on a positive upside view, a negative downside view and a current central view. In each scenario the US economy dips into recession. In the central case, there is expected to be a gradual, but accelerating recovery starting in the third quarter. In the downside case, the virus lingers through the summer and delays economic rebound until early 2021.
The central case scenario assumes successful social distancing measures force a flattening of the virus infection rate. The patterns seen in China and South Korea imply a peak of new COVID-19 cases by the middle of the second quarter and a lifting of quarantine measures by mid-year. China and South Korea, which were among the first to feel the effects of the virus, shut down their economies early and saw infection rates fall. As both countries return to work, infection rates have remained low. It is too early to declare victory, but so far so good.
Often previous recessions have been followed by strong recoveries, although we need to be mindful it does take time for markets to get back to their previous trading range. However, it should be noted our multi asset diversified approach to investment using reputable fund managers provides an element of downside protection during market falls and it also provides an opportunity for investment managers to put cash to work and to restructure portfolios to take advantage of the recovery.
This being said, we are expecting to eventually overcome this virus, although once again the question of duration is key when trying to understand the impact of the virus on global economies and financial markets and the shape of the recovery curve. The successful recovery of businesses and economies around the world will be largely dependent on the time it takes to return to business as usual and there is pressure on governments to lift restrictions so businesses can survive and economies can return to normal with minimal structural damage. Furthermore, central bank policies and government fiscal policies have been widely praised for their positive impact, propping up economies, businesses and individuals with a variety of measures that help create a sort of ‘induced economic coma’ so that when restrictions are lifted, as much as possible can return to normal.
The following charts help illustrate the significance of the loosening monetary and fiscal policy measures across the globe:
Another glimmer of hope is that following the disappearance of the virus, economies could respond with a surge in demand for goods and services and suppliers will hopefully be able to meet this demand by ramping up output, encouraged by the loose monetary and fiscal policy environment. This type of euphoric recovery was similarly witnessed in the US post war phase during the ‘golden fifties’. From a long term investment perspective we continue to interpret current market valuations as a long term buying opportunity and we urge investors who have already been exposed to recent market volatility to remain patient and weather the storm. Of course, we expect short and mid term volatility because as always financial markets will be driven by the inherent human behaviours of fear and greed. However, trying to time the markets is near impossible and the best days to be invested tend to be the early days of the recovery phase. These recovery moments tend to happen suddenly and when the general outlook is still bleak.
We will of course continue to keep you posted with any developments and should you have any queries in the meantime feel free to get in touch.
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The information contained in this article is intended solely for information purposes only and does not constitute advice. While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.
