Market Summary - April 2020
Summary
While bigger themes such as global politics, BREXIT and trade deals should not be forgotten about, and are indeed perhaps longer term factors not to lose sight of, the prior few months have been all about COVID-19 and the oil price. As the COVID-19 outbreak has spread beyond mainland China to over one hundred countries and across six continents in the past two months, markets and investors have become unnerved by the fear of the anticipated human impact, which has prompted a significant government and policy response, and a dramatic reassessment for the path of economic activity and corporate profitability going forward.
This epidemiological threat was further compounded by the breakdown in OPEC and Russia, who in being unable to agree production cuts to support a weakened market, have instead driven oil prices downwards. In the long-term, any lower oil prices following a supply response can be a positive for the global economy in the same way as a tax cut provides. In the short-term this is typically outweighed by the risk impacts to oil earnings and capital expenditure plans.
Coronavirus Fightback
There has been a large amount of fiscal and monetary stimulus as part of the ‘coronavirus fightback’ global policy response. These include near zero interest rates across US, UK and other areas, open purchases of corporate bonds in Europe and US (like during the financial crises), significant amount of bridging -loans for businesses and covering employee wages which may be cut or for those unemployed. These will all help to limit the impact of COVID-19 with varying time scales, but importantly when the recovery does come it will be immensely fuelled by all the above stimuli, perhaps to a greater extent than the bull run post the financial crises.
More recently, sentiment has shifted as investors focus on the declining pace of coronavirus new case growth and the exit strategies for the European lockdown. This pick up in sentiment has allowed investors to look through some of the very poor economic data that has been released in recent weeks. The highest profile of these relate to employment reports with records being set as unemployment cases surge. Coronavirus looks quite similar to other crises in its impact, but history will likely point to the speed of its escalation as much as any other factor.
Patience
During the financial crisis it took 200 days for the global equity market to fall into a bear market, this time it took just 20. This pace and the sudden lockdowns of economies have had a concertina effect on economic data meaning that the gradual worsening of data during a recession is being squeezed into a smaller number of data points. For the time being though, investors are placated that it appears the European lockdowns will more of the magnitude of 2 to 3 months rather than the 6 to 9 months being openly discussed during March. With the cost of money now even lower than it was at the start of the year, markets are willing to be patient and wait for economic and corporate data to improve.
In such rapidly moving irrational markets, when everything is sold down indiscriminately, standard benchmarking is perhaps not the most practical as it can create a short-term mindset and take the focus away from a long-term objective. The falls over late Q1 have been indiscriminate and seen across all asset classes, except for cash and government bonds (arguably now the most expensive investments available). But importantly we believe any hit to growth to be temporary on the path to long term returns. The global productivity and demand build-up being seen at the end of 2019/start of 2020 was very encouraging, but in our view has just been put on hold for the time being and will be a pent-up pressure for when the world is encouraged to start growing again; we want to be exposed to this when it does.
We thus retain our preference for equities over bonds and view the current levels of equities as an attractive entry point for investors over the medium to longer term. As fund managers around the world bring portfolios back into line with their asset allocations after the selloff they are incrementally adding to equity and we would also encourage this. Therefore, to reiterate we are starting to adding back into equity at these levels, albeit slowly.
Source: Brooks Macdonald
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