The week starting 23 March saw governments and central banks around the world continue to take further steps to counteract some of the impact of the economic shutdown stemming from coronavirus.
In terms of central bank activity, the biggest announcement came from the Federal Reserve (Fed) when they announced before the market opened on Monday 23 March that they would buy unlimited US treasuries and agency mortgage backed securities. Later that day, they also – perhaps more importantly – announced they would support the corporate bond market. They now have the ability to buy investment grade bonds both in the newly issued market and secondary market among existing investors.
In terms of government policy:
- The US Congress approved a fiscal package worth US$2 trillion, which is around 10% of GDP, and features support for household incomes via direct transfers, expansion of unemployment benefits, loans to small businesses, as well as funds to help businesses.
- In Europe, Germany announced a €800bn crisis spending package.
- The UK government pledged support for the self-employed impacted by the virus – a package that was in line with the previous announcement aimed at company employees.
These cash flow ‘bridges’ for both businesses and households aim to provide a positive news flow given we are starting to see the impact of the shutdown in economic data releases. For example, last week’s filing saw US unemployment benefit claimants surge to a record 3.3m last week, up from 282,000 the previous week. This is more than four times the previous 1982 record high of 695,000.
What is now beginning to occupy minds is the length of the shutdowns – information which is key in determining the overall impact on economic growth and therefore asset prices. After all, until companies know what their future cash flows are, markets cannot know how to discount those cash flows and place a value on assets. This remains a challenge given the lack of a global medical policy and medical innovation.
Different countries are taking different medical advice on the best way of bringing the virus under control, which could result in widely divergent outcomes; for example, if a country shuts down too late…or opens up too quickly. Different countries’ populations are also responding differently to government policy.
Testing is extremely important, both to establish the number of infected and to ascertain who has had COVID-19 and may have developed immunity. If governments can assess if a part of the population has some form of immunity, it could speed up the process of reopening that country’s economy.
In the immediate term, the focus is on increasing hospital capacity and equipment, not only to deal with the peak in the number of cases, but also to create a level of comfort that future cases can be dealt with and therefore allow people back to work quicker.
The silver bullet remains the introduction of a vaccine ….but this will take time. In the interim, however, an existing drug or technique could be used to reduce/help symptoms e.g. last week the US Food and Drug Administration announced that they will soon allow doctors to treat coronavirus patients with plasma donated by those who have survived the virus – a technique that was used on some patients during the 2002-3 SARS outbreak.
In stark contrast to the indiscriminate selling we saw the previous week, last week saw all markets jump sharply higher. Although this could be seen as a reaction to the large policy responses announced, we would like to caution that markets often have a tendency to ‘bounce’ after falling, if only because short sellers may have had to buy to close out positions.
All asset classes generated a positive return last week, with world equities up +12.7% in US dollar terms and +7.9% in sterling terms – the difference being the weakness in the US dollar after the Fed’s action reduced the sharp demand for US dollars. Within equities, the broad based buying meant all sectors generated strong returns, although – unlike the previous week – cyclical stocks outperformed defensives, with energy and industrials the best performing sectors. The more dependable compounders, i.e. companies with high quality franchise businesses such as consumer staples and communication services, lagged the broader market.
Emerging markets equities also rallied strongly although still lagged developed markets.
Within bonds, the announcements by the Fed helped returns across all areas of fixed income. Global government bonds rose (+1%) despite the rally in riskier assets, and global investment grade (+3%) and global high yield (+4%) increased, with credit spreads tightening in over the course of the week.
Monitoring economic growth across the different countries allows us to see when the virus comes under control, and potentially how long countries will have to remain in shutdown. In terms of the economic data, this week sees:
- Wednesday 1 and Friday 3 April – the release of March purchasing manager index (PMIs) manufacturing, services and composite data from around the world. Expect them to be bad. The flash PMIs that have already been released by a number of countries showed a collapse in readings across the board. In some cases to record lows, signalling that the global economy is heading for a sharp contraction. PMIs are made up from a range of data from managers buying goods and services for firms to use in the following month.
- Thursday 2 April – the US weekly jobless claims has already provided a record high, but we should expect another very big number, especially after the US stimulus package increased unemployment benefit.
- Friday 3 April – US payrolls report for March will give the first US jobs number that start to cover the widespread economic disruption caused by the coronavirus. However, the release may not reflect the current extent of all job losses.
There are no scheduled significant central bank meetings until the end of April, but these are very unusual times and that could easily change.
Meanwhile, as we flagged before, our investment committee continues to meet on a daily basis during the week. We’re not yet ready to increase risk in portfolios, but we are very focused on this matter and will be able to act decisively when the time is right. We are very cognisant that we are custodians of our clients’ assets and are using all our experience, knowledge and skills to endeavour to achieve the best outcomes possible.
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.
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David is responsible for developing and delivering our investment proposition for private individuals, trustees and investment consultants. He works in partnership with our teams of private bankers in fulfilling our purpose of protecting our clients, advising them with integrity and making their lives easier.
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 and Investment and a Chartered Wealth Manager