Firstly, I hope you had a good long weekend and had enough chocolate to take your mind off what was a rather subdued and bizarre Easter period. At least it was sunny!
Please find below our Investment Market Update as at 14th April 2020.
Blue Sky Investment Market Update
Positive signs continue
Since my last communication, UK investment markets have been closed for the most part but markets in Asia and the US have shown positive signs of encouragement. Moving forward, the question now for markets is “what do they focus on”? Should it be the lifting of restrictions and a careful transition out of lockdown, or should attention be more towards corporate earnings, where we are likely to see some devastating numbers.
As I write, equity markets are sanguine, although more buoyant in Germany where they have seen a drop in Covid-19 infections over recent days.
Clearly, Governments are in a difficult position as they try to ‘flatten the curve’ and not overload their healthcare systems whilst also trying to balance the risk associated with the economy. The fear, of course, is that transitioning out of lockdown could lead to a resurgence in cases.
It looks like here in the UK it will be another 3 weeks before there will be any relaxation of the guidance, and we will watch with interest as to how successful our European neighbours are with lighter restrictions. The European Commission is due to present its guidelines on Wednesday, but we all anticipate that there will be significant disruptions in the months to come. The question is, how much and how will this impact business and economies?
The European Stoxx 600 index briefly posted a level which was 20% above its low point in March. This would typically signify a ‘bull’ market. However, we are now entering the earnings season with companies reporting on their first quarter figures. Early indications from some of the large financial institutions in the US are encouraging, but of course the impact may be reduced because the virus reached the US later, compared to many other countries. Fidelity International analysts expect earnings to fall by nearly 50%, globally, over the year. Ouch!!
It’s accepted that earnings will be bad over the short-term, but the lockdown is shorter than initially feared and businesses begin to get back to some sort of normality and there is a strong bounce in economic activity and a rise in asset prices. With all the stimulus we have seen, areas of the economy begin to surge.
Earnings may be a lot worse than anticipated. The lifting of the restrictions may happen too soon, and the economic impact is greater than anticipated. This will really hit companies badly and prolong the agony, resulting in many going bust. As we have seen in the US, unemployment could soar very quickly and consumer confidence collapses. This would undoubtedly see stock-markets move lower.
Strap yourselves in for what is likely to be a bumpy ride. We can’t see the market movements being as dramatic as we experienced in the couple of weeks before the 20th March but, marrying off the optimism around looser restrictions against what will inevitably be poor earnings, will test everyone’s resolve.
However, we have the underpin of all the stimulus and if we could obtain a co-ordinated response from the G20 and G7 countries that would go a long way to settling the nerves. The stimulus to date has merely bought the authorities time but it’s also important that the support on offer from Governments gets to those in need, and quickly.
Certain companies and sectors will come out of this relatively unscathed, especially those with strong balance sheets. Many companies will have to restructure but this could actually make them leaner and ultimately, down the line, more profitable. Sadly, some will be no longer!
As we know, events can turn very quickly but remember, the markets are inclined to focus on where we are going and not where we have been.
Have a good week.
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.