MARKET COMMENTARY – APRIL 2020

The first quarter of 2020 has been an extremely difficult one for investors.  While it was clear that we were in the later stages of the economic cycle, nobody would have predicted that large parts of the global economy would be brought to an abrupt halt by the COVID-19 pandemic.  The debate of whether a global recession was likely has swiftly moved onto the question of how deep the inevitable recession will be and how long it will go on for.

Stock markets around the world moved rapidly to reflect this new reality with most falling by in excess of 20% over the first quarter, including the FTSE All-Share in the UK, which declined by more than 25%.  Traditionally defensive assets performed as expected, with government bonds rising in price as central banks cut interest rates and restarted quantitative easing. Gold has also delivered positive returns year to date.  Along with equities, corporate bonds declined in value as the restrictions on normal economic activity raised concerns about corporate profitability.  Commodity prices aside from gold also saw sharp falls as demand declined due to the measures taken by countries around the world to bring the spread of the virus under control.  Oil in particular was caught in a perfect storm, with an agreement between OPEC and Russia to constrain supply breaking down just as the outlook for demand fell, this led to a fall in the oil price of more than 60%.  Lower oil prices if persistent, will however aid economic recovery when this comes through, although the current situation is clearly damaging for a number of oil dependent economies and oil production and related companies.

It is clear even without waiting for the traditional sources of economic data, that there will be very substantial damage to the global economy and this has already been seen in unemployment claims, car sales and confidence surveys.  It is clear that the slowdown is not comparable to a normal recession but is rather a sudden shock to the economy, large parts of which have effectively been put into hibernation.

This massive shock has prompted unprecedented action from governments and central banks around the world to offset the worst of the potential long term damage to their economies.  The scale and speed of the response has given some optimism that a prolonged and deep period of recession or even depression can be avoided.  Policies such as that introduced by UK Government to pay a significant proportion of worker’s wages during the shutdown in an attempt to avoid large scale layoffs of staff, should help to preserve economic capacity to enable a sharper rebound once the virus situation is under control.  Government loans are also available to help companies avoid cash flow induced difficulties and in the USA, a huge stimulus package worth over USD 2 trillion includes a range of measures to support businesses and workers.  This has been combined with central banks slashing interest rates to record lows and continuing to provide liquidity, along with expanding asset purchase programmes to enable government borrowing costs to remain low.

Nevertheless, there will undoubtedly be casualties amongst the hardest hit companies where a loss of sales may become permanent if demand fails to recover to previous levels.

While highly restrictive measures to control the spread of the coronavirus remain in place, it is impossible to predict the outlook for the global economy with any degree of certainty but there will undoubtedly be a material impact on activity and this has resulted in the rapid revaluation by markets of the value of companies and other assets.

A degree of reassurance though can be taken from the interventions made by governments and central banks to support households and businesses and to facilitate economic recovery when the public health issues are under control.  There are some signs of optimism here, with East Asian countries including South Korea, China and Taiwan having made substantial progress in controlling the number of new cases and deaths whilst in badly affected western economies including Italy and Spain the numbers are beginning to reduce.  It is still much too early to have any confidence in a point being reached at which markets can mount a sustained recovery however and even more than the usual diversification by both region and asset class, including cash, is very important.

Performance to 6 April 2020

 *March 2020