AFM No Comments

Market update – Friday 17 April 2020

I hope this finds you well and safe at home (for another 3 weeks at best).

This week we have seen a wide range of information released and while some of it has been rather bleak, there has also been many positives which have caused markets to continue their rally. World stock markets made a sprint towards a second straight week of gains today after President Donald Trump laid out plans to gradually reopen the coronavirus-hit U.S. economy following similar moves elsewhere and news of reports that patients with severe COVID-19 symptoms had responded positively to a drug made by U.S. company Gilead Sciences.

Economic and corporate data was always going to be very poor and therefore the reaction by markets to confirmations of this fact are more to do with the general mood of the market than the data itself. The best example of this is the initial jobless claims report which has been the blockbuster data set when it comes to the impact of the virus and one that was released yesterday. We have seen over 16 million people file for support in the last three weeks, however on each of the days we have seen the jobless figures released the US market has rallied by at least 2% with one day over 6%. As a result, we firmly believe that the duration of the lockdowns is the primary focus of the market rather than data, be it corporate or economic. New case growth and governmental progress towards exit strategies will dominate the medium-term trend for equities.

The world continues to closely watch China, and also now the experiences of those European countries entering into the first phases of exit from lockdown.

China’s first quarter GDP was every bit as bad as investors expected but the March activity in the world’s second-biggest economy gives some cause for optimism.

What we have seen in China may give us some indication as to what could be experienced in other parts of the world where we see effective containment strategies, curves flattening and economic activity returning. We have also seen globally strong levels of government and central bank intervention, particularly in the US and Europe and these may help to support growth over the medium term.

Since the first quarter ended, China has seen a strong recovery, both in consumption and fixed asset related activities. There was an announcement that schools would reopen, and we have seen the lifting of restrictions on people being able to leave Wuhan. More broadly we saw 90 per cent of people return to work by the second week of April, and 90 per cent of construction activity restarting, especially in the context of infrastructure related projects.

China’s worst quarterly contraction in decades was largely in line with low expectations: overall GDP slumped 6.8 per cent year-on-year in the first three months and was down about 10 per cent from the previous quarter. What really matters now is the pace of recovery following its lockdowns, which will serve as a bellwether for the rest of the world.

While households still seemed to be struggling in March, we see rather good news in the Chinese corporate and industrial sectors. State-owned enterprises are driving a rebound in investment activity, real estate is picking up, and manufacturers are quickly recovering with the outbreak now under control. Across the board, we are seeing signs that this is an economy very much emerging from the phase of economic activity being heavily restricted, as it dealt with the containment of the virus, and starting now to move into more normal activity patterns. The best news came in industrial production numbers, where the fabled ‘V-shaped’ recovery seems to be materialising. March saw an unprecedented 32 per cent month-on-month bounce, taking output to within a whisker of 2019 levels after a horrific start to the year.

We shall continue to keep you updated, we are operating efficiently from our home bases and our message is still very much ‘sit tight and wait for the recovery’. As always, if you wish to get in touch to discuss any aspects of your investment portfolio, please do not hesitate to contact me. It is a new tax year with new pension and ISA allowances, and I believe there are some very good reasons to invest now should you have the capacity.

To contact us by telephone, please call:

Ashford office: 01233 646 666 

Hastings office: 01424 457 080 

Kind regards,
Mark Eaton
Director

AFM No Comments

Market update – Wednesday 1 April 2020

As news reaches us today that the UK lockdown may have already begun to slow the spread of COVID-19, I wanted to get in touch to share our current views with you. Despite the market movements so far today, there have been a number of positive news stories released this week and I thought it would be beneficial to share some of these.

Markets finally received what they wanted from US lawmakers at the beginning of the week. The House of Representatives passed the $2trn package providing direct fiscal support to citizens and businesses impacted by the economic fallout from coronavirus. This was taken positively by markets though a lot of the good news was already in the price after the strong rally we saw last week. The theme of the last fortnight has been increasingly dramatic intervention by governments and central banks globally. Our expectation is that this will now take a pause for the short term and markets therefore will take their tone from two factors: estimates over the expected duration of the coronavirus lockdowns and economic data that hints at how much activity has stopped. That said, there are already rumours of a new US $600bn fiscal package being agreed between the White House and Democratic Congressmen and should this come to fruition it is likely to boost sentiment further. The bill is expected to include more state aid as well as specific assistance for the mortgage market and travel industries. This shows the political will to add to the current stimulus in order to cover gaps in previous policy or to address emerging risks in certain sectors of the economy – this reassurance may be more powerful than the stimulus itself.

We expect to see extensive weakness in economic data sets as they are released over the coming weeks. The US initial jobless claims showed how dramatically the brakes have been put on in some sectors of the economy. This is unlikely to be unique so expect many headlines announcing the ‘worst reading since data collection began’. The more positive aspect is that this is what the markets are expecting and a good deal of this is already in the price. The main question is how long this will continue. Expectations are for the brunt of the slowdown to occur in Q1 and Q2 of 2020 however should this extend market sentiment could turn negative again. This is why new case growth slowing, and any success in antibody testing, is so critical for near term optimism.

The major news from yesterday was the Chinese Purchase Manufacturing Index surveys, which point to a rebound in economic activity post the lifting of the lockdown in the country. The manufacturing and the services measures both moved above 50 implying an improvement in conditions. Clearly this needs to be taken with a slight pinch of salt as the global slowdown that is expected from coronavirus will undoubtedly impact both supply and demand in China. However, the latest figures will start to add weight to the argument that we will see a V shaped recovery in the Western world once the lockdowns are concluded, particularly if fiscal stimulus provides a significant boost to activity in the interim.

Given increased efforts to contain the spread of the coronavirus, we anticipate a sharp (but we hope short) contraction in the world’s biggest economy, the US economy, which has likely already entered into recession this month.

We expect, however, that this could also turn out to be among the shortest recessions in history. Importantly, we assume that the need to significantly restrain activity, such as the closure of non-essential businesses, will dissipate by late in the second quarter. Under such a scenario, and with aggressive fiscal and monetary policy measures, we would foresee a rebound in growth in the third quarter to mark the end of this sharp yet short recession.

Next Monday, 6 April, sees the start of the new 2020/21 tax year and this brings with it opportunities for investing fresh money into the markets, using available allowances such as ISA and pension contributions.  Given that the price of most equities has become much lower than it had been, investing now means that equities have more room to grow before they reach what analysts assess as their fair value. Markets have rebounded somewhat from their lows on 23 March, however, are still down significantly from the start of the year, for example, the FTSE All Share index is still down over 26% since January, representing a potentially good time to invest.  If you would like to discuss this in more detail, please do get in touch with me.

Please click on the below link to view a chart which I recently received from Vanguard, whose investment strategies we regularly recommend, entitled ‘Bull and Bear Markets’. This chart shows market cycles since 1900 and helps to demonstrate the value of staying the course.  It shows that bear markets, which is where markets fall more than 20%, have historically always been short in duration and followed by a longer period of growth. While we have never experienced such restrictions to movement and a subsequent drop in demand, markets have experienced sudden shocks before as demonstrated in the graph, and we can draw on this experience.

https://www.vanguard.co.uk/documents/adv/literature/bear-and-bull-chart_uk_en_pro.pdf

The months ahead will be trying times for all of us, as consumers, investors and people contending with the virus. But we have faith that there are better days ahead and would urge you to continue to take a long-term investment view. Investing for the long term gives your money the greatest chance of growing in value. But this means holding your nerve during periods of significant stock market volatility – and remembering that, as history shows, markets will recover.

If you wish to speak to your financial adviser directly about any aspect of your portfolio, you will find their contact details on the About us page. We have accounts in place with Zoom and as such are able to carry out face-to-face discussions with you using this technology, in place of physical meetings.  Our contingency arrangements across our offices are now in place, but please be assured we are working hard to deliver the best outcomes for you, keep you updated and guide you through this unsettling period.

To contact us by telephone, please call:

Ashford office: 01233 646 666 

Hastings office: 01424 457 080 

Kind regards,
Mark Eaton
Director