COVID-19 Market Update – 03/08/20

As predicted in the last update, the investment market has been fairly stable but is beginning to show signs of volatility with the recent announcements of the actual drop in GDP worldwide in the second quarter of 2020.

Global share markets struggled to hold on to recent gains over the past weeks as tensions between the US and China escalated, with tit-for-tat consulate closures in Houston and Chengdu. There were also signs that the rebound in the US economy was waning, with initial jobless claims rising for the first time since March. Increasing coronavirus cases in numerous countries added to worries.

Bond yields fell, the gold price hit a record high as investors looked for safe havens and the US dollar fell to its lowest level for two years when compared to a basket of other currencies.

Last week’s markets performance*

  • FTSE100: -2.64%
  • Dow Jones: -0.75%
  • S&P500: -0.3%
  • Dax: -0.63%
  • Hang Seng: -1.5%
  • Shanghai Composite: -0.54%

*Data for the week to close of business on Friday 24 July.

Holiday chaos

Markets started the week cautiously on Monday. Asian shares were mixed, the US rose, but equities in the UK and Europe lost ground. The FTSE100 closed down by 0.3%, and the Eurostoxx600 index also fell by 0.3%. Travel stocks shouldered the worst of the losses on the back of the government decision to impose a two-week quarantine on travellers returning from Spain.

It had a knock-on effect as many travellers to other destinations cancelled their holidays fearing a similar last-minute change to the rules. But the UK was not alone; France also warned against citizens travelling to Catalonia, and said those returning from a list of 16 countries outside the EU would be subject to mandatory testing at the border on arrival.

Virus news

While global case numbers continue to rise, driven largely by emerging economies, there have been renewed spikes in numerous locations including Japan, Hong Kong, France, Canada, Germany and, of course, Spain. However, it is the progress of the virus and policy response in the US that will have the greatest impact on the global economy.

In that sense at least, there were hopeful signs in the US that new infections were peaking, and there are several factors which suggest that the economic impact of the virus in the coming months won’t be as severe as it has been in the past.

Firstly, the rise in cases is partly explained by the increase in testing. That means the headline case number is less worrying and it also means more people who know they are infected can self-isolate and be treated.

Hospitalisation rates have been lower and are falling. That means more minor cases are being identified and people are self-isolating, and it also suggests that high-risk groups are isolating to keep out of harm’s way. Additionally, those who are hospitalised are getting better faster. Treatments have improved and the ICU mortality rate has declined. All these factors suggest that repeating the total lockdowns seen earlier in the year is not a viable option.

Road to recovery

While recent economic data has generally been better than expected, that trend has been less pronounced in the UK than other regions. Although the initial purchasing managers’ indices for July show activity is improving, the data is only relative to the previous month and so does not really tell us a great deal other than things aren’t quite as bad as they were in June.

While the direction of travel is welcome, there’s every reason to expect the UK recovery to be slow as the job retention scheme is unwound over the coming months.

Brexit and trade deals

The current state of Brexit negotiations also implies a slower trajectory for the UK. Whilst opinions differ, the market views any frictions between the UK and EU as inhibiting UK economic activity. Last week the Telegraph reported that government insiders are resigned to the fact that they may be trading with the EU on World Trade Organisation terms in 2021. The FT reported that the government are equally resigned to the fact that a trade deal with the US will not happen ahead of the US elections this year (and therefore will be pushed back to the next congressional session starting in the new year).

The first of these stories is presumably part of the bargaining strategy and doesn’t necessarily change our view that a thin trade deal can be achieved later in the year, but will likely still mean some economic disruption. The second weakens the UK hand in further negotiations but is not a surprise given that the US has typically been a tough partner for smaller countries to negotiate with. Both scenarios present some headwinds which could add to volatility.

With all this said, we are still cautiously optimistic that the economy will continue on what we now know will be a long road to recovery. As always, a well-diversified portfolio isn’t reliant on any particular asset class performing well all of the time and in general they never all perform well at the same time. Your portfolio will be matched to the appropriate level of risk to suit your circumstances and will be well diversified.

GPFM update

Everyone at GPFM is still working effectively and efficiently from home, with no plans to change that in the immediate future. We are open for business as usual and if you need any additional advice or know of anyone who would benefit from our services, please do get in touch.

If you would like to speak to an adviser, please give us a call on 01992 500261.

Data and insights from Brewin Dolphin