Covid-19 Market update - 09/06/2020
May seems to have passed in a sunny blur and we are now entering month four of restrictions. Markets have shown remarkable resilience. The first quarter of 2020 was the worst three-month period since records began; the second quarter has, so far, been the best quarter in more than eighty years.
Below are some common questions we hear at GPFM are getting asked.
Why have we seen such a sharp recovery?
There are a couple of factors at work here. Firstly, March showed a complete capitulation as the “certainties” that we all rely on was replaced by an impenetrable screen, hiding any view of the future. Countries all over the world were shut down and economies had ground to a halt.
In that environment, forecasting company profits became – at best – guesswork, making valuing companies nigh on impossible. Inevitably, as the fog cleared, markets were able to take a more rational approach to company valuations, and markets recovered from a very oversold position.
Secondly, markets are invariably forward-looking, meaning that they are not pricing in the “now” that we all live in – a world of uncertainties, filled with economic disruption, with little freedom of movement, with millions reliant on government support – but rather looking forward to a point in time where restrictions have been eased and economic activity has been restored. Markets are, essentially, looking forward to 2021 being a considerably better year than 2020 – a viewpoint most people would agree with.
Was this all a storm in a teacup?
The answer to this is a resounding no. Current forecasts are that we could be facing the worst economic recession for 300 years – hardly surprising when vast swathes of the global economy have been shut for three months. A recovery could still be some way ahead.
Indeed, even after the recent rally, the FTSE 100 Share Index is still down more than 16% in 2020. Thankfully, well-diversified portfolios have produced a considerably better result than this, returns enhanced by the relative outperformance of the US equity market.
Why has the US outperformed?
The “shape” of the US equity market is very different from that of the UK. The UK stock market has, historically, been dominated by the Oil & Gas, Mining, and Bank sectors – areas that have been particularly hard hit both by the economic disruption and by the collapse in the oil price.
By contrast, the S&P 500 Share Index in the US is a far more diverse index. It has a large exposure to software, technology, internet retailers, and interactive media. Indeed, more than a third of the index is in companies like Microsoft, Amazon, Alphabet (aka Google), Netflix, Facebook, and other technology-related companies. The difference in performance between “old” industries and “new” industries has been profound.
What about a second wave?
It could happen – there is plenty of historical precedents – but the difference is that this time it will not be completely unexpected. Markets have, to some extent, priced this in and it is difficult to foresee something “COVID” related that would completely destabilise markets again.
Most countries have instigated much better control procedures and any lockdowns (and ensuing economic disruption) are more likely to be local in nature. In fact, as the weather in the northern hemisphere gets warmer, there are signs that the pandemic is easing and relaxation measures are happening quicker than initially thought.
Of course, it may be in the UK that the timetable has been rather accelerated by a desire to change the narrative on the front pages of newspapers. In any event, we are likely to see some steps backward along the journey as we have seen in China and South Korea, but it feels more a case of two steps forward, one step back.
Are there still clouds on the horizon?
Aren’t there always? The presidential election in the United States is approaching fast and, what seemed like a clear victory for Donald Trump six months ago is turning to dust in his hands – very few presidents have been re-elected with an economy so shaken.
In his desire to seek a crisis (to demonstrate his presidential credentials) by increasing tensions with China and some very ill-judged comments on the current deplorable state of race relations in the US, his actions have probably had the opposite effect. China itself is exerting more control over Hong Kong which is also increasing tensions with the West. And then there is the B word.
The B word?
Whilst we were all probably bored with Brexit previously, it now seems a good distraction from the Coronavirus! Brexit is an issue for the UK (in particular) as some agreement must be reached by the end of this month about our final departure at the end of December. Trade talks have made little progress – unsurprising given the current challenges facing Europe – and are becoming more fractious.
Europe is also very unwilling to reopen agreements already made and there is a sense of exacerbation with the UK’s position of trying to “rewrite the script”. We have, of course, already left – the negotiations are over the transition agreement.
There is every reason to extend this further beyond December, given the level of economic disruption caused by the pandemic, but it feels as though a Johnson administration – elected only six months ago on a promise of getting Brexit done – will not feel able to negotiate an extension, regardless of the economic situation.
Should I be worried?
Worried is not the right word. Brexit, for example, is a potential issue for those of us that live in the UK, a smaller issue for Europe as a whole, and possibly an opportunity for the rest of the world. We need to be aware of the things that might happen and try to plan accordingly. As such, your portfolio, diversified by risk, asset, geography an industry will enable you to continue to participate in any ongoing market recovery over the months ahead.
There will inevitably be ups and downs, that is the nature of investment. If you are seeking returns greater than the “risk-free” return of cash, you must understand that. However, we have been very pleased with the recovery so far and remain hopeful that markets will continue to make progress over the remainder of the year and into next year.
About GPFM during this time
Here at GPFM we are all working remotely from home and will likely do so for the foreseeable future. It has been a fairly seamless transition; our staff and clients are embracing technology changes and hopefully, some good improvements will materialise from this pandemic.
The new way of communicating and receiving documents electronically has sped up many of our processes but if you prefer to receive documents in the post, no problem. We do still have one member of staff checking the post in the office every other day so that we can deal with all tasks as efficiently as possible.
If you would like to speak to an adviser, please give us a call on 01992 500261.