The latest view from our Investment Team
Investment markets remain extremely focused on coronavirus developments and its impact on the global economy, although US-China relations remain a concern and Brexit still lingers in the background. With more countries now through the initial virus peak and beginning to gently reopen their economies, there is confidence that the economic impact will begin to lessen. It is clear though, that the impact of lockdown and social distancing measures has had a dramatic impact on economic activity, with data for the first quarter showing significant declines in GDP and forecasts for the second quarter are expecting record-breaking plunges in many economies.
To support companies and employees through this short-term crisis, central banks and governments have continued to take substantial measures. Whilst there are some concerns over the longer-term impact of increased debt levels, the cost of borrowing is extremely low and to help support the economic recovery it is important to avoid large-scale bankruptcies and unemployment. This pandemic has accelerated some trends that were already occurring such as the move towards online shopping and the greater reliance on technology, but although some business models may struggle to re-establish themselves there will be others that prosper.
Equity markets have rallied strongly from the March lows as confidence grew in the controlling of the virus and the boost from fiscal and monetary support measures, but there remains a danger that opening up economies will lead to a second wave of the virus or the economic damage that has been inflicted will not recover as quickly as the optimists expect. Some lasting damage seems inevitable and some behaviours may have been changed, but whilst consumer spending and business investment may take a while to recover towards previous levels, the overall economic impact will hopefully be kept to a modest level.
Within equity markets they have become very polarised between companies that are relatively well-placed for this current environment, such as technology and healthcare companies, and more economically sensitive or service-based sectors such as banks and leisure companies. This has favoured the US market with its strong exposure to the former, whilst markets like the UK and Europe are more exposed to the latter. The performance and valuation difference between ‘value’ and ‘growth’ sectors was already growing and has been extended towards record levels, so there is a healthy debate in the investment world about whether this difference has gone too far or are we now in a new world where genuine growth is scarce and deserves to be more highly valued.
In the fixed income world, despite the massive increase in supply to fund support measures, government bonds remain supported by central bank buying and safe-haven demand and UK gilts have seen healthy returns as yields have moved close to 0%. The initial sell-off in corporate bonds saw yield spreads over and above the equivalent government bond yields widen, but central banks extending their buying to investment grade corporate bonds has helped them recover their recent losses.
The short-term outlook for markets continues to remain dependent upon virus developments and how effectively economies can reopen as lockdown restrictions are eased. A second wave of cases is a risk, but a successful vaccine would be a big boost, so whilst volatility has eased somewhat it remains well above normal and this two-way volatility is likely to continue as investors assess the ebb and flow of news developments. The equity market recovery has reduced some of the valuation attractions we saw in recent weeks, but even with the expected cuts in dividend payments there is still good income support compared to lower risk assets such as government bonds and cash. Investors with suitable risk appetites should retain confidence in the longer-term attractions of equities as part of appropriately balanced portfolios.
After the rapid decline in equity markets and other higher risk assets as coronavirus spread throughout the world and major parts of the global economy were effectively shut, we have seen a useful recovery in recent weeks as some confidence has returned. Whilst some countries are yet to see the virus peak, most are now seeing cases decline and the debate has moved on to the relaxing of lockdown restrictions.
The economic and corporate impact of the social distancing measures has been substantial and we are seeing data that is in excess of what we saw in the 2008-09 global financial crisis, with large declines in economic activity and corporate sales and profits. To avoid numerous company failures and massive unemployment it has been vital that authorities provide financial support through this short-term economic shock and that when the lockdown ends that we see a decent recovery in demand.
Central banks and governments have continued to provide extensive support and markets are optimistic that fundamentally viable companies will come through these exceptional conditions and be able to recover most of the lost activity when conditions normalise. While authorities seemingly will do ‘whatever it takes’ to provide this support, it will still be important that lockdown conditions ease as soon as reasonably possible over coming months or the longer-term damage to government and corporate finances will become more problematic.
Early indications from countries that have begun to ease the lockdown have been broadly encouraging, showing that with suitable social distancing businesses can return to work without seeing a second wave of virus growth. Demand in many areas will not fully recover quickly as some restrictions will remain and consumer and business habits will take a while to normalise, but signs of things moving in the right direction have been important for investor confidence. Improvements in virus testing, monitoring and any potential vaccine can provide further confidence that we can return towards more normal conditions.
Global equity markets have now recovered more than half of their initial 30% falls as they continue to show an encouraging ability to look through the current difficult conditions and focus on the future recovery. This optimism is based on expectations that the lockdown will be gradually eased, no second wave of the virus and demand recovers strongly later this year and into 2021. Whilst that is a reasonable central scenario, there are clearly some risks that worse outcomes are possible which could see a reversal of recent market gains.
We have also seen further exceptional developments in the world of oil. With oil demand significantly reduced by the impact of coronavirus and supply reductions yet to come through, a lack of storage capacity in the US saw local prices briefly move well below zero. This was to some extent a technical issue and the global oil price remained positive, but it is well below pre-coronavirus levels and is causing issues for that important sector of the global economy.
In the fixed income world, UK government bond yields have remained just above 0% as central bank buying and safe-haven demand has offset the negative pressure from the massive increase in supply to fund the wider support measures. The initial sell-off in corporate bonds saw the gap between corporate bond yields and government bond yields widen, but improved confidence in the eventual economic recovery and central bank buying has seen investment grade bonds recover their recent losses.
The short-term outlook for markets remains dependent upon virus developments and the economic impact of the containment measures and how soon and how extensively they can be relaxed in key economies. Whilst volatility has eased from the recent extreme levels it remains well above normal and this two-way volatility is likely to continue as investors assess the ebb and flow of news developments. The equity market recovery has reduced some of the valuation attractions we saw in recent weeks, but even with the expected cuts in dividend payments there is still good income support compared to lower risk assets such as government bonds and cash. Investors with suitable risk appetites should retain confidence in the longer-term attractions of equities as part of appropriately balanced portfolios.
Whilst it is increasingly clear that the impact of the widespread shutdowns and social distancing is going to cause a deep short-term recession, investors have taken encouragement from recent coronavirus trends and the exceptional level of support being provided by central banks and governments and last week saw a strong global rally in equities.
With more countries now hopefully through the peak in the virus, attention is increasingly turning to the difficult decision of when and how extensively to relax the current lockdown restrictions without risking a second wave of the virus.
China has shown that once the virus is under control economies can begin to be reopened, although this will be more of a challenge in the developed world who have more service-based economies which will likely require a slower return to normal than the more manufacturing based Chinese economy.
Markets have shown a welcome ability to look through the short-term economic and corporate risks and have recently focused more on the expected rebound in activity. We are now entering the first quarter corporate results season, so in addition to the exceptionally weak economic data expected in coming weeks investors will also have to cope with a stream of updates from companies on the impact of coronavirus on their businesses. It feels like there will need to be substantial reductions in profit forecasts and more dividend cuts are expected, so it will be interesting to see if these headwinds will temper the recent rally.
Another welcome development has been the recent deal between oil producers to reduce output in light of reduced demand and this should provide some support to the oil price after heavy declines.
Some equity markets have now recovered around half of their recent declines (less so in the UK), so the attractive valuation opportunities are not as strong as they were and further recovery will likely require continued evidence of virus control and confidence that the social distancing measures will be eased and longer-term economic and corporate growth will return towards normal levels.
In the fixed income world, whilst government bond yields have remained close to 0%, we have seen the recent widening of income returns on corporate and government bonds also partially reverse as confidence in the eventual economic recovery has grown.
In conclusion, the short-term outlook for markets will continue to be dominated by coronavirus developments and the economic impact of the containment measures and how soon they can be relaxed. As we have seen recently, market volatility can be both on the upside and the downside and this two-way volatility is expected to continue and investors should try and retain a longer-term focus.
Despite the increasingly severe economic impact, with some encouraging signs of the coronavirus outbreak looking to be peaking in key European countries and investors taking comfort from the scale of central bank and government support measures, equity markets have recovered somewhat from their recent heavy declines.
It is clear that the economic damage being caused by the widespread shutdowns and social distancing measures is significant. The scale and speed of the decline in economic metrics is unprecedented and already on a scale similar to the financial crisis of 2008-09, but it is likely to be relatively short-term and it is still anticipated that there will be a substantial recovery in activity once the containment measures are eased.
Clearly there is a difficult balancing act looming as authorities look to limit the economic damage by easing the restrictions as soon as reasonably possible without risking a further escalation of the virus. Whilst the virus is yet to peak in places like the UK and the US, we are taking comfort from the initial return towards normality in some key Asian economies such as China and that the social distancing measures in earlier adopting European countries such as Italy are showing signs of success.
With some confidence that the virus can be brought under control, the key market driver is likely to become the scale and duration of the economic impact and the extent and shape of the recovery. The nature of this situation and lack of historic precedent makes this very difficult for forecasters to accurately predict the impact, but most commentators currently suggest a short sharp setback and a gradual recovery towards normality.
There will be corporate casualties amongst those with underlying weaknesses and many companies are seeing profits decline and are cutting dividends to preserve cash, but the extensive global monetary and fiscal stimulus measures and promise of more to come if required should ensure that viable companies can be supported through this short-term shock and return to growth when conditions begin to normalise over coming months.
The collapse in the oil price following falling demand and a price war amongst key producers had been a further factor fuelling market volatility, but this has also shown signs of recovery in recent days. However, coronavirus will continue to be the dominant driver of asset markets and investors will remain keenly focused on the path of the virus, the extent of the economic impact and how soon economies can be reopened. This will continue to create elevated two-way volatility and we will monitor the situation and look out for investment opportunities that can add value to our funds.
Whilst the coronavirus outbreak continues to escalate in the key economies of Europe and the US, the pace of development has been largely within expectations and extensive stimulus measures have given equity markets a welcome boost after recent extensive falls.
Economic indicators have begun to show significant weakness as widespread shutdowns and social distancing measures have impacted both supply and demand, with a key question being how long will these restrictions need to remain in place? Encouragingly, China has begun to return to work and markets will be closely watching for signs that Europe and the US will also be able to get the virus under control and begin to ease the containment measures and limit the economic damage.
News of the virus peaking in the likes of Italy and Spain or developments in vaccines and coronavirus tests will give investors encouragement, but signs of a second wave of infections in Asia or restrictions having to remain in place for many months would cause concern.
Last week did see further evidence of governments and central banks stepping up to the plate, with extensive monetary and fiscal stimulus, including a $2 trillion package of measures from the US. Measures have matched and in some respects gone beyond those used in the 2008-09 financial crisis.
With encouragement from statements that authorities will do ‘whatever it takes’ to support the global economy through this short-term shock, investors have begun to take comfort that whilst there will be corporate casualties, fundamentally viable companies will survive until conditions return towards normality and central banks will provide sufficient liquidity to keep markets functioning effectively.
It will be interesting to see what the longer-term repercussions of all of this stimulus will be and we have already seen a UK credit rating downgrade, but for now government bond markets continue to be working well as a safer haven for investors. However, with yields now close to 0% future return prospects look limited at best.
Coronavirus will continue to be the dominant driver of markets and they will remain hostage to the ebb and flow of news around virus developments, the extent of economic damage and policy stimulus announcements and further two-way volatility is likely to continue for a while.
However, investors can take comfort that once the painful short-term human and economic impacts have passed there will be a substantial recovery in activity and longer-term economic and corporate prospects do not seem to have been significantly damaged. Whilst all investors are understandably nervous in these unprecedented conditions, we continue to closely monitor the situation and look for attractive medium to longer-term investment opportunities that volatility like this can create.
With the global coronavirus outbreak continuing to develop at an alarming pace, the economic impact is now expected to lead to a significant short-term decline in activity. Whilst supply disruptions are a negative factor, it is the collapse in demand across many areas as a result of social distancing measures that is now doing the most damage.
The hoped for policy response from central banks and governments for substantial support for the global economy and to ease some of the stresses appearing in the financial system has been forthcoming and at unprecedented levels. We have seen interest rates cut to record lows, massive asset purchase programmes, emergency lending facilities and major fiscal stimulus and support packages to try and avoid mass lay-offs.
Given the truly unprecedented nature of this medical crisis, markets are still uncertain as to whether these actions will be sufficient to counter the significant financial and economic costs of the pandemic, but authorities seem committed to do whatever it takes.
We are already seeing many companies slash their sales and profit forecasts and cut their dividends to preserve cash, but the support measures being taken to help viable companies through this economic shock should prove vital to begin giving investors confidence that these companies can survive until conditions return towards normality.
In addition to the extent of the economic damage, the other key consideration for markets is the development of the virus. Whilst some parts of the world such as China are already through the worst, the major economies of Europe and the US are yet to peak, and investors will be eagerly watching for signs that the measures being taken will get the virus under control. Italy is at the forefront of the epidemic and when their new cases begin to decline it may give encouragement to markets.
With the economic damage potentially on a scale similar to the 2008-09 financial crisis, investors are also becoming nervous over the emerging signs of additional stresses in parts of the financial system, although authorities are acting to support the smooth functioning of markets.
While the scale and depth of the crisis has continued to escalate, we remain optimistic that after the painful short-term impacts there will be a substantial recovery in activity and longer-term economic and corporate prospects will not be significantly damaged.
With large declines in global equity markets, losses in corporate bonds and an expected decline in some commercial property values, most investment portfolios have been having a difficult time after a long period of gains. We are still in the eye of the storm and volatility is expected to remain at elevated levels, but a lot of bad news has now been factored in by markets and current equity valuations look attractive in most scenarios. Investors are understandably very nervous, but should try and retain a longer-term focus if possible and look through to the eventual recovery from this short-term crisis.
The pace of development of the spread of coronavirus and the measures being taken to reduce public interaction around the world have escalated beyond previous expectations.
It is now clear that the extensive reduction in human contact in coming weeks is going to have a significant short-term impact on a number of industries and overall economic growth will be much reduced in 2020.
However, central banks and governments are increasingly taking unprecedented actions to help bridge the anticipated drop in economic activity and support fundamentally viable companies through this difficult period.
Investors are understandably very nervous in the current environment. However, once markets gain comfort that vulnerable companies can survive through this crisis then it is reasonable to expect that economic activity will rapidly return towards normality when the virus has worked its way through and companies will recover.
Authorities are providing extensive support to business, but it will need to be seen as sufficient enough to avoid widespread business failures in order to support investor confidence.
The other factor that will help risk appetite recover will be signs that the spread of the virus is beginning to peak outside China. It is anticipated that evidence of that happening in Italy could be another key catalyst to give confidence that the radical actions being taken are working and that other countries like the UK would likely follow a similar path.
Developments in China and South Korea and the history of previous outbreaks give us some confidence that conditions will normalise.
Whilst most of the focus of investors has been on the volatility in equity markets, elsewhere we have seen a recent significant drop in sterling which provides some support to returns on overseas equities for UK investors.
In the fixed income world, we have seen an increase in UK government bond yields from the early March levels of around 0% and corporate bonds have seen more substantial increases in yields as risks have risen.
Coronavirus has rapidly emerged as the dominant short-term driver of asset markets and investor sentiment, but there are reasons to be optimistic that after some painful short-term impacts and temporary lifestyle changes it will pass without doing substantial longer-term economic or corporate damage.
Whilst heightened volatility is expected to continue for now, for investors with a longer-term focus and the ability to withstand the volatility we are beginning to see some increasingly attractive investment opportunities in equities following the significant market falls.
Read views from our Investment team following further falls in stock markets, oil prices and interest rates, as the economic impact of Coronavirus continued this week.
With the spread of coronavirus and the growing economic impact of the preventative measures being taken, investors have become increasingly risk averse. Already nervous markets were further impacted by the collapse in oil prices, as a failure to agree production cuts in response to falling demand led to a price war. Whilst lower oil prices are ultimately good for many, it raised concerns over the health of oil companies and the impact on banks and investors that lend to them.
More countries are resorting to extensive preventative measures to stop the spread of the virus and relatively less impacted countries so far like the UK and the US look like they are heading down a similar path. The short-term economic impact now looks like it will lead to a slowdown or mild recession before the virus dies down and economies return towards normality.
Clearly there are business casualties in certain areas, and Flybe will not be the only corporate collapse. However, there are already signs that the virus is peaking in early impacted countries like China and history suggests that economies and markets will not see significant long-term damage.
Central banks and governments are beginning to take action to support economies and companies through this temporary downturn, such as the cut to the interest rates and budget measures announced by the UK on Wednesday 11th March.
There are some signs of minor stresses in the financial system, but unlike 2008 the health of the banking system is in a much better place to withstand this volatility so there is nothing to suggest this economic slowdown will develop into a wider credit crunch.
Investors need to be mindful that further short-term market weakness is possible if the impact of the virus escalates beyond current assumptions, but with equities having now fallen around 20% from their recent peaks there is a lot of bad news now priced in.
Fixed income assets and cash continue to provide support to balanced portfolios in times of market stress, but UK government bond yields are now close to 0% so investors should be mindful that future return prospects in this area may be limited at best.
Whilst investors need to be prepared for the increased volatility that comes with equity investment, there are growing relative valuation attractions now available in equities on a medium to longer-term view.
Hear from our Investment team on the impact Coronavirus is having on the markets.
Coronavirus and its potential impact on the global economy has rapidly emerged as the key driver of asset markets and investor sentiment in 2020.
The initial consensus was that this was likely just a temporary and largely localised issue mainly effecting China, with a similar modest impact to that seen in the 2003 SARS outbreak. With equity markets at close to all-time highs in early 2020, this view left equities vulnerable to a spread of the virus and following significant growth in cases outside China there has been a rapid and substantial drop in equities and a flight to invest in assets such as government bonds and cash.
China is now a much larger part of the global economy than it was in 2003 and current data is showing their extensive efforts to isolate the virus have led to a dramatic slowdown in their economy. China is also vitally important to global manufacturing supply chains, so their shutdown will be having a further impact on the wider global economy. With the virus now in many other countries, the economic impact is set to spread as preventative measures such as travel restrictions, the curtailing of mass gatherings and school closures hit growth.
With the recent double-digit equity declines, the initial market complacency is now over and moderately negative scenarios have now been priced in. Investors will be closely watching the development of the virus and any actions the authorities are taking.
Although previous epidemics – such as SARS – can give us some reassurance that impacts are short-lived, it should be acknowledged there are potential scenarios from a sustained Coronavirus outbreak that could have a more severe long-term impact on the market.
Further market weakness is possible, but there are a number of reasons why investors should not panic.
- Central banks have been key to the recovery since the financial crisis and they are poised to act decisively once more to support growth, although their impact may be limited
- Also, after many years of austerity, there are growing expectations that governments such as the UK will be shifting towards more expansionary fiscal policy which will support economic growth
- Whilst markets will remain nervous until we see a peak in cases outside China, there are already some encouraging signs that the robust measures taken in China may have succeeded in containing the rate of spread of the virus
- Trying to time the market is notoriously difficult, long-term investors should remain calm, and retain well-diversified portfolios.
- Once the virus impact settles down, there is nothing to suggest that the global economy will not return to its previous growth rates after the short-term shock
- Whilst it is too early to confidently call the market bottom and we must be prepared for more volatility, as long-term investors we are beginning to see some more attractive medium to long-term opportunities as equity valuations have become more appealing following the market falls.
Please note the value of your investment can rise or fall and you may get back less than you invested.
Why financial planning is important in these times
The Coronavirus impact on the markets may have you thinking, ‘how does this affect my financial plan?’ All of us will have different financial lives and plans but here are some key points to keep in mind:
- Volatility is normal in the markets recognising that Coronavirus has caused severe impact. Identifying the top and bottom of the market is notoriously difficult. Selling after a large fall often means that investors miss out on any subsequent upturn.
- Holding a diversified portfolio that gives you exposure to shares, bonds, property and cash can help reduce the impact of market volatility as falls in one part of your portfolio may be cushioned by positive performance in another
- Investment managers may see falling share prices as an opportunity to invest in companies they see as having good longer- term prospects. Expert buying in this way can bring investors benefit over time
- It’s important to focus on your original reasons for investing. Meeting regularly with your NFU Mutual financial adviser can help you make sure your financial plans stay on track.
To find out more please speak to one of our financial experts.