Financial markets have always been prone to react quickly, sometimes intensely, to news flows as they try to price in potential disruption to or support for economic activity.
Two weeks ago, governments and central banks announced support through a number of measures. However, with the big announcements largely behind us, markets last week focused mainly on the pandemic itself: the number of new cases; public healthcare policy responses around the world; and any medical advances. Medical progress, in particular, is crucial, not only in reducing the loss of life, but also in shortening the length of the economic shutdown.
As the number of cases of COVID-19 worldwide passed the one million mark on 3 April, double the cases from the week before, the US probably faces the toughest outlook. Of the 250,000+ cases, New York State alone has more cases than China, and its number of cases is not expected to peak until the end of April.
The continued rise in cases sees governments around the world extending restrictions on movement beyond the initial deadlines, from around the middle of April to the beginning of May. However, based on China’s experience, we would not be surprised if they are extended even further.
Encouragingly, the growth in the number of cases in Italy and Spain fell to its lowest level since the beginning of the outbreak. The restriction of movement does seem to help reduce the spread.
Efforts continue to find a medicinal answer, even if it is only partial. Doctors in China have reported positive results from the use of an existing anti-malaria drug in helping to speed up recovery times and improve overall symptoms. Meanwhile, researchers at the University of Pittsburgh, Johnson and Johnson and Gilead, among other pharmaceutical companies, say they are making headway in the development of a vaccine. Unfortunately, the time horizon for any mass-produced vaccine would be at least 12 months away.
Companies are looking to do what they can to survive. As the headlines count the numbers of furloughed workers, 120 companies out of the FTSE350 list have so far suspended dividends – even if the money is not immediately needed – to strengthen balance sheets in these uncertain times. However, not all businesses are struggling – UK grocery sales reached a record high of £10.8bn in the four weeks to 22 March.
Data showing the extent of the impact is beginning to come through. A European economic think tank published a report released last week that showed electricity consumption across Europe had declined between 14% and 29% across different countries due to the lockdowns, but the falling levels have since stabilised, except in Spain and the UK. Meanwhile, there is also attention paid to the weekly filing for US unemployment benefits, which surged to another record high of 6.6 million, over double the previous week’s number. To put those numbers into perspective, the worst week in the financial crisis was a jump of 665,000 in March 2009.
While the unemployment numbers were grim, news that Trump had brokered a deal between the Saudis and Russians to cut oil production prompted the equity market and oil prices to rally strongly on Thursday 2 April. By Monday 6 April though, doubts had been cast on the deal and the OPEC+ meeting was postponed to Thursday 9 April to allow more time for a deal to be cemented.
Most financial markets were lower last week and quarter-end rebalancing is in the rear view mirror. World equities were down -1.1% in US dollar terms and -0.7% in sterling terms. Within equities, the more defensive stocks outperformed cyclicals, with healthcare and consumer staples among the best performing sectors. The more economically sensitive sectors, such as financials and industrials, lagged the broader market. And despite the energy sector showing the biggest increase in value, it remains the weakest sector year-to-date.
Regionally, emerging market equities fell but by less than developed markets, helped in part by their larger weight towards the energy sector.
Within bonds, the decline in risk assets meant government bonds generated a positive return. The standout performer in fixed income last week, however, was easily investment grade corporate bonds with global investment grade increasing (+1%) and US investment grade (IG) increasing (+1.5%). The announcement two weeks ago by the Fed regarding their ability to buy IG corporate bonds has really helped support the market, with most corporate bond funds, including high yield, registering inflows and reversing some of the outflows seen in the middle of March. This shows the stabilising influence of broad-based central bank support. This central bank support has also made it a lot easier for the market to absorb a significant amount of IG bond issuance over the last few weeks.
What’s happening in portfolios?
As we stand today, corporate bonds and equities are certainly pricing in a pretty serious recession, and there are some material uncertainties about how long the lockdowns will run. The longer the timeline, the bigger the risk that the economic downturn will be more prolonged and damaging than markets are pricing in.
So we have been making sure that should we see further pressures, our portfolios are equipped to handle them and we have room for manoeuvre. Using the income strategy as an example, we have close to 40% of the portfolio invested in US Treasuries and cash. In the balanced strategy, over 34% is in cash and Treasuries.
As well as that, we’ve trimmed some of the alternative investments to better focus on the ones that have bounced back so strongly, such as our renewables energy investments. Some have now risen beyond the price targets we set, which in turn provides us with an opportunity to trim and raise some cash, to potentially be redeployed, should we see further market distress.
Events this week
Beyond the growth in the number of infected and the number of deaths, eyes will be on Eurozone leaders who are holding further discussions on their joint economic policy response to the virus on Tuesday 7 April. The debate will centre on the difference between Italy and Spain’s stance on the subject of a joint bond issuance versus the desire by France and Germany to resurrect the European Stability Mechanism and allow conditions to be placed on countries that use the vehicle.
On Wednesday 8 April, the US Federal Reserve will release the minutes from their unscheduled 15 March meeting and shed light on the discussions that led to lowering the federal funds rate’s target range by 100bps down to 0-0.25%, and increase bond purchases by US$700 billion. The weekly US jobless claims data will be published on Thursday 9 April and, as it is the most real time economic release, we expect another large number!
Finally, financial markets will be closed in a number of countries at the end of the week for Good Friday. Hopefully the long weekend will allow markets to enjoy a break from the constant news flow. Rest assured we remain vigilant and continue to work to ensure portfolios are well-positioned to get through these events.
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 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