Last week – the week of 6 April – saw positive market sentiment and markets rise in value with the narrative focused on the slowing rates of growth in the number of new COVID-19 cases in parts of Europe and the US, enabling attention to shift to possible exit strategies from the lockdown and economic activity being kick-started. Unfortunately, we believe markets are being overly optimistic. Economies will struggle to reopen fully anytime soon given the need for increased hospital capacity, widespread testing, improved patient treatment, and, ultimately, the delivery of a vaccine.
However, some countries have announced partial relaxation of the rules, including Austria, China, Denmark, Norway, and Spain. More governments around the world will follow suit as they look to reduce the impact of the pandemic on economic activity, probably by allowing certain groups back to work either by age, location, or immunity. However, this would only occur when governments feel they can track the source and cope with any new wave of infections.
In the Eurozone, policymakers took two long weeks to agree on the fiscal support measures and instruments required. At the heart of the issue remains lingering distrust between southern member countries and the northern regions. However, on Thursday 9 April, they finally agreed to a €540 billion package.
In the US, the latest weekly filing for US unemployment benefits surged by 6.6 million, more than was expected, taking the cumulative total of jobless claims to circa 17 million. On Thursday 9 April, the US Federal Reserve (Fed) announced additional ‘whatever it takes’ actions, as well as more detail on the other programs announced. The aim is to provide up to USD2.3 trillion in loans to support the economy.
The Bank of England announced that it would, on a temporary basis, directly finance the UK government, due to concerns that the high and immediate demands on funds would not be able to be adequately financed in the gilt (UK government bond) market. This action is positive for the short term as it is yet another ‘whatever it takes move’ that reassures markets, although perhaps it raises concerns for the long term.
Towards the end of the week, OPEC+ finally announced plans to reduce production by 10 million barrels per day i.e. 10% of annual supply. However, in yet another twist, Mexico cast doubt over these plans, after apparently refusing to sign up to its share of cuts. Even if OPEC+ succeeds in reducing output, it may not be enough to prop up prices while demand continues to drop during the lockdown.
In financial markets, world equities were up +8.7% in US dollar terms and +7.1% in sterling terms, with the difference being the weakness in the US dollar. Within equities, the broad-based buying saw all sectors generate strong returns, although cyclical stocks outperformed defensives, with consumer discretionary, IT and financials the best performing sectors.
Regionally, emerging markets equities also rallied strongly, although they still underperformed the developed markets.
Within fixed income, the rise in appetite for riskier assets meant government bonds generated a negative return. Instead, last week’s standout performer was easily high yield corporate bonds with global high yield bonds increasing by +1.8% and US high yield bonds increasing by +2.0%.
What’s happening in portfolios?
Our alternative investment holdings have now mostly recovered very strongly, and some to the extent that they have risen beyond the pre-agreed target for our allocations. This led us to sell some holdings to trim these investments back to neutral levels.
As we believe the economic downturn may be more protracted, we have increased the bias of the equity portion of multi-asset portfolios towards higher quality and stable earners, and reduced exposure to the cyclical sector. Within our growth strategies, we have reduced our equity exposure a little to allow more room for future opportunities.
Meanwhile on the fixed income front, our bias towards shorter duration investments helped as the longer-dated government bonds gave up some of the gains made last week.
We continue to monitor the daily cash flows in and out of all of the underlying funds in which we invest, while looking carefully for any signs of significant changes. None of our underlying funds have experienced any liquidity or trading issues, and nor would we expect them to given we only invest in highly-regulated and conservatively managed funds, and steer clear of unregulated funds, hedge funds, structured products, or funds that invest in illiquid assets.
Events this week
The key indicator to monitor remains the growth in cases in different countries, as that will indicate if countries are getting this virus under control and potentially how long countries will have to remain in shutdown.
In terms of global institutions, the IMF and World Bank hold their spring meetings (via video conferencing) this week. The IMF’s semi-annual World Economic Outlook was published on 14 April and included its view that the global economy is projected to contract sharply by -3% in 2020, much worse than during the global financial crisis, but even then only if the pandemic fades in the second half of 2020. This mirrors the minutes from US Fed’s 15 March meeting that revealed they envisaged two economic scenarios: (1) a calmer outbreak that brings an economic recovery in the second half of the year; and (2) a more adverse scenario which would mean the rebound would not get underway until next year. The minutes also flagged the view that the coronavirus slowdown is different to the global financial crisis in that impact is seen as temporary and the US banking system is healthy.
In terms of economic data, the focus remains on weekly US jobless claims data published each Thursday as it is the most real time economic data. We will also get a big economic data dump from China with Q1 GDP numbers expected to show a decline of -5.8%. March industrial production and March retail sales are released on Friday for the EU and US.
Q1 earnings season is also starting this week with 33 companies in the S&P 500 reporting. In the UK, close to half the companies listed on the stock market have announced dividend cuts or suspensions, although we view this as largely sensible under the circumstances.
Notwithstanding last week’s better run for risk assets, we remain concerned regarding the high level of uncertainty on the future path of the virus, as well as the length and extent that the global economy will be disrupted. Further volatility seems likely, and we believe the notion of a quick ‘V-shaped’ recovery is now wishful thinking on the part of some investors.
Until satisfactory progress has been made on a deployable vaccine and/or more effective treatments, we should expect a series of partial lockdowns and reopenings around the world. While the number of cases and deaths appears to be peaking in some of the more closely followed locations, the virus will remain a threat.
The immediate outlook is for more very poor global economic data releases. Companies Q1 earnings reports over the coming weeks are likely to show some of the damage already sustained. Any guidance company managements provide is likely to be highly conservative – CEOs, like everyone else, do not have crystal balls and don’t know how things will unfold.
Now, more than ever, it is crucial that we make use of the experience and knowledge of our investment professionals and continue to stick to our evidence-based investment process. I can assure you that this is what we continue and will continue to do.
If you are interested in finding out more, you can also access our quarter-end investment webinar on 22 April at 12.30 pm, when we will go over the last three months’ news flow, explain what changes we have made to portfolios and share our view as to how events might pan out and what the impact might be on markets going forward. You can also ask any questions about our investment approach. You can register for this webinar here, although please note that you will need to register for an account with our webinar provider, if you haven’t joined a webinar so far.
Clients of Nedbank Private Wealth can get in touch with their private bankers or relationship managers directly to understand how their portfolios are responding to market events or call +44 (0)1624 645000.
If you would like to find out more about how we can help you manage your investments, please also contact us on the same number as above.
Interested in more updates?
David is responsible for spearheading the growth of our wealth management business across the company’s international jurisdictions. He leads our teams of private bankers and specialists responsible for fulfilling our purpose of protecting our clients, advising them with integrity and making their lives easier. Prior to taking on his current role, David was integral in developing the bank’s investment proposition for high net worth individuals, trustees and investment consultants. He is also a member of the bank’s executive committee.
He has over 25 years’ experience working for global blue-chip companies in both London and Jersey, and providing investment solutions to a wide variety of clients around the world. David is a Chartered Fellow of the Chartered Institute of Securities & Investment and a Chartered Wealth Manager.