The week of 20 April again saw mixed market sentiment. The negative news focused on plummeting oil prices, disappointing trial COVID-19 treatment results, US travel restrictions, poor corporate earnings and weak economic data. The positive stories centred on further talk of exit strategies and a general slowdown in global case numbers.
In terms of exit strategies, EU leaders approved the guidance from Brussels which set out three criteria on how and when to end restrictions, including: a stable and significant decline in the spread of the disease; appropriate health system capacity; and the availability of widespread testing and tracing systems to monitor future outbreaks.
The Eurozone purchasing manager indexes (PMIs), where activity dropped at its fastest pace on record, were a mirror of those in the UK. In addition, the UK’s March retail sales saw their biggest monthly fall since records began, dropping 5.1%, while CPI numbers fell to 1.5% year-on-year as disinflationary pressures from weak demand started to come through.
There was some disappointing news in terms of a potential treatment last week. A trial of the drug made by Gilead showed that it did not improve the condition of COVID-19 patients or reduce the level of blood-borne pathogens, as well as causing significant side effects in some. This left scientists and investors disappointed.
On Wednesday 22 April, President Trump followed through on a threat to suspend immigration into the US by signing an order preventing people from applying for green cards for 60 days, and possibly longer.
Meanwhile the Q1 corporate earnings season clearly showed the effect of the shutdown, with Delta Air and United Airlines, as examples, announcing huge pre-tax losses. Even Coca-Cola, long regarded as less vulnerable to recessions, saw sales drop by 25% quarter-on-quarter. Meanwhile, the latest filing for US unemployment benefits saw claims increase by 4.4 million, down from 5.2 million the previous week, but bumping the total to a new record of 26 million.
On Tuesday 21 April, the US passed a US$484 billion interim relief package which should replenish funds for emergency small business lending and shore up national coronavirus testing.
EU leaders endorsed a short-term €540 billion package on Thursday and agreed to develop a ‘recovery fund’ to support governments with limited fiscal ammunition. However, there were no indications about the size of that fund or whether it will be made up of loans or grants.
In terms of other news, and as we noted in Thursday’s update, US oil prices crashed into negative territory for the first time in history on 20 April, settling at under -$37 a barrel.
The news resulted in the MSCI All Country World Index ending down -0.9% in sterling terms, and -2.0% in US dollar terms. Friday then saw the US market up while other markets were down. Results remained mixed at the sector level too. Some cyclical industries, such as energy and materials moved higher from their lows, although others continued their downward trend, including financials and real estate. Some defensive sectors, such as healthcare and communication services, also continued to perform well.
What’s interesting to note is that even though we’ve seen a fairly spirited bounce in markets from the lows, it hasn’t been led by the sectors and styles that have particularly underperformed, and there continues to be a focus on high quality investments.
What’s happening in portfolios?
The trend in sectors is one that we have been focusing on in recent weeks. The proceeds of the sale of positions in small caps and the more cyclical sectors have been used to bolster funds that focus on quality. We think there is still plenty of trouble ahead for weaker companies, and the recovery, when it comes, will be more drawn out than a V-shape given the likelihood of secondary outbreaks and lockdowns only being eased gradually.
Even as we see better treatment of the sick, and ultimately a vaccine, the gradual loosening of lockdowns still has an effect. In China, for example, we see factory production coming back online reasonably quickly, but personal spending isn’t. People are scurrying to and from work without spending much. The hope of pent up consumer demand suddenly being unleashed into the economy may also be too optimistic, even for economies such as the US, where consumption accounts for about 70% of GDP.
In our fixed income investments, activity was fairly subdued. This was good as most of the news focused on the oil market with the largest impact being on the US high yield market, causing upset in the broader US credit market. While our investments have very little exposure to the US oil producers who do look vulnerable, there was an element of contagion into other parts of the credit market. Our short-dated US high yield exposure proved a modest drag on performance, although our global investment grade and US government bond holdings helped to make up for most of the shortfall.
Our property and alternative investments continue to react to the constant market-level news flow regarding lower rental income, the impact of COVID-19 on care homes, and the likelihood that wholesale electricity prices will be a bit subdued in the short term due to lower overall demand for electricity in the lockdown period.
Events this week
Many American states are set to reopen, while a number of other G10 countries are also contemplating exit measures. This represents a window of hope for global economic activity, although any second waves of infections would lead to further economic disruption.
In terms of economic data, the focus remains on weekly US jobless claims data published on Thursday as it is the most real time economic release. The Federal Reserve meeting may also result in more support for businesses via monetary measures, while the European Central Bank meeting should result in some much awaited support, particularly for those countries hardest hit.
More purchasing manager numbers will be published this week. China’s numbers, on Thursday 30 April, will give us an indication of how its economy has recovered as the lockdown was eased. Friday sees the release of the final PMIs from Japan, the UK and the US, and there’s also the ISM manufacturing reading from the US.
The euro area and US release Q1 GDP this week. Expected to be poor, they won’t show the full effects given widespread lockdown only really started in March. The euro area flash CPI estimate for April on Thursday 20 April should give us some idea as to how downward pressure from energy prices is affecting overall numbers.
Last but not least, the corporate earnings season is now in full swing, with 173 of the S&P 500 companies reporting, including a number of big names, such as Apple, Amazon, Alphabet (Google), Visa and Merck just to name a few.
On a final note from me, we were pleased so many were able to join last Wednesday’s webinar – a recording of which is available to view if you missed it. As always, please let us know if there are any questions you would like answered via your private bankers or relationship managers.
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 to understand how we might manage your money.
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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.