Market Summary - May 2020
Where are we?
The events of the last few months are something that we've never experienced however we would like to give you some insight into our current thinking.
To do that we need to put some perspective around how big the shock has been to both the global economy and ultimately world stock markets, as we've witnessed one of the most sudden declines in equities since the 1930’s.
For context this is the third bear market of the 21st century (a bear market being a drop of 20% or more - so the end of the dot come bubble and the GFS). The difference being that it took just three weeks to get to that point, whereas normally it's a period of months.
Why so quick? - Fear
Something in the developed world, we've not experienced. We don't have first-hand experience of SAR's outbreak in 2002-2004 (774 deaths) and certainly no experience of the current shut downs and the way we've all had to adapt to a new way of life We all now know the horrific loss to human life that COVID-19 has brought circa 350,000 at time of writing.
Impact of shut downs we need to focus on in respect of the economics and markets
In describing the impact of the virus, we are going to use the analogy of "economic" and "financial" clocks.
The economic clock has effectively stopped as the various forms of lockdown have been implemented in order to slow the progress of the virus.
The financial clock is still ticking however as rents & other bills have to be met.
Governments and central banks have done a huge amount already to ease the pain and try to get the economic clock ticking again. This includes both monetary policy (what we mean by that is lowering of interest rates – US dropped 1.5% in two weeks / UK now down to 0.1%) and fiscal policy (focused on relief to businesses and households suffering short-term income disruptions – think of the support put in place by the UK for both the employed and self-employed).
The key question is, will this be enough?
We've already seen some really poor numbers coming through - the Chinese economy shrinking by 6.8% in Q1, data out last month confirming the US economy contracted by 4.8% and the fact that circa 39m people have registered for unemployment benefits in the US in the last 2 months (that's nearly 15% of the labour force). The assessment of most economists is that Q2 numbers are likely to be far worse and over the course of the year, we're likely to see a 10% contraction in global growth - much worse therefore than the GFC, and comparable to wars and the Great Depression. Christine Lagarde (ECB President) warned Eurozone GDP could fall 15% this year.
So, with all that negative news, why have markets recovered?
Markets are obviously forward looking and are brushing off news flows …they are past the point of maximum panic. We witnessed the news around global GDP recently yet the S&P currently sits at a level close to where we were 12 months ago.
What do we think?
New infections bending lower, attention turning to exist strategies and the nature of the recovery.
Exit from lockdown gradual, partial and subject to reversal (Italy, France and Spain taking tentative steps following China and Korea - workforce back).
All eyes on these economies for learns - South Korea (incredible testing and tracing capability and one of the reasons Industrial production +4.6% in March).
Even a halting reopening should spur a strong rebound in growth and we expect a recovery in China from in Q2, and recoveries elsewhere in H2.
As a result we're forecasting global growth of 9.5% in 2021. The magnitude of the stimulus should act as an elastic band, helping to snap the global economy back once the virus shock abates. Uncertainties remain high however and we're therefore picturing a ragged W shaped recovery where do see periods of volatility as there is still the potential for lockdowns to be re-imposed.
What does that mean from an investment perspective?
Importance of diversification - Government Bonds one of the few asset classes to deliver positive returns in Q1, being diversified should help to dampen the volatility of your investment portfolio.
Think global – Global markets have significantly outperformed UK markets, we need to think global when looking for investment opportunities.
Look at sector exposure – Tech & pharma outperformed and this is relevant looking forward as countries invest more in healthcare and companies build on the efficiencies experienced through their working from home capabilities.
Flight to quality – Strong balance sheets, focus on corporate debt levels, looking at impact on dividend payment and rotating out of sectors that we see as vulnerable are all important as we move forward.
Importance of staying invested…..
Whilst none of us have ever experienced anything like this before, history has taught us that the best trading days often follow the worst and we have seen numerous examples of that over recent weeks.
Go back to the speed of change, in a period of months we've seen a 30% fall and a 20% bounce.
Research tells us that it pays to remain invested:
This article does not constitute advice, should you require advice or further information please contact your usual consultant. Alternatively, you can contact us via telephone on 02476 388 911 or by email to [email protected]. We are available Mon - Thursday 9am - 5pm and Friday 8:30am - 4:30 pm.