Please find below our Investment Market Update as at 15th May 2020.
Blue Sky Investment Market Update
GDP is reporting on history: markets are focused on the outlook
For some of us, this transition into the next phase of lockdown is a welcome relief. Yet, from speaking to many of our clients, certainly those who are retired, there is also a mix of cautious optimism and a degree of pessimism about lifting the restrictions – fearing that infection rates could increase significantly.
In many ways, this sums up the investment markets, but their welcome relief was weeks ago, with support and stimulus from central banks and Governments. Obviously, the transition out of lockdown was also a boost to sentiment but after a super strong rebound in stock-markets across the world in April, the immediate direction of travel is much more uncertain.
Grabbing the headlines in the financial press this week, is the news that UK GDP fell by 2% in the 1st quarter of the year. The worst fall since quarter 4 in 2009, when it fell by 1.6%.
Of course, the figures do matter to an extent, but it doesn’t take a genius to work out that productivity and consumption will have plummeted. It will be even worse in the 2nd quarter, but the data won’t be available until early August. The general outlook could be very different and considerably more positive by then, just at the time when UK economic data will be at its worst, so watch out. This is when will learn that we are officially in recession.
This cross thread is always a difficult one for your average investor. The news is reporting on what’s happened, but the outlook is what drives the markets.
The outlook for GDP is that it will likely bounce in the 3rd quarter of 2020.
We all know it’s going to be messy!
There is a long queue of ‘experts’ ready to air their views on any data, any comments and any announcements. It’s a feeding frenzy and, like with the modelling regarding the potential medical impact of the virus, the extremes are marked.
However, we all know the data is going to be awful. We all know there are going to be corporate casualties. We all know it’s going to be messy. Hopefully, we also realise that this is what happens during recessions. It’s not desirable, but it happens.
The Federal Reserve (US) Chairman, Jay Powell, commented on Wednesday about the severity of this economic downturn. He cautioned that an economic recovery may take some time to gather momentum. This feeds into our belief that this recovery will be more in the shape of a ‘tick’ rather than a V shaped recovery.
However, did Jay Powell say anything that we didn’t already know? I’m not sure he did but analysts were forensically dissecting his speech looking for clues as to the immediate implications for the economy and businesses.
His comments come at a time when there are concerns about a second wave of infections and how this will hamper efforts to open the global economy. China and South Korea have already seen renewed clusters of Coronavirus cases but, surely, this is hardly surprising. I feel we should expect this in the UK and be prepared. The danger, of course, is if our health service becomes overwhelmed. From what I’m hearing, in many parts of the country, hospitals on the whole are coping well right now.
Expect more stimulus
Stepping back and looking at the big picture of this crisis for a moment, there is no doubt that the swift financial support for businesses and employees was key. This delivered confidence when there was fear. Several businesses I’ve spoken to said if it wasn’t for the job retention scheme and loans for their business, they would have closed already.
Despite the negative news-flow, I believe we are in a better place than was implied just 4-5 weeks ago. There were fears that economies may shut down for 6 months or longer. Despite the size of the death toll, we now see Europe transitioning to the next phase towards ‘normality’, after weeks of lockdown.
It is likely that more stimulus will be delivered in China to boost their recovery and we believe this will be replicated across all the developed economic nations which will in turn, boost investor confidence.
Just when there was hope!
So, Mr Trump has rattled the Chinese cage again! Last night he warned that he could ‘cut off the whole relationship with Beijing’. He is clearly trying to call China to account for the economic impact caused by the Coronavirus.
Trump has ordered the US Government’s main pension fund not to invest in Chinese stocks, prompting Beijing to warn Washington against turning frictions into a “financial fight”.
He’s desperate to be elected, he’s desperate to blame China, and desperate to get the US economy up and running as quickly as possible.
As Sanjay from LGT Vestra stated, “it’s a dangerous game upsetting the Chinese too much, especially as they own over 60% of US Treasuries”.
How have the markets reacted?
It’s been a bit choppy this week, but equities are positing an end-of-week rally on the back of official data indicating that China’s economy has continued to improve. According to the FT, industrial output resumed last month whilst retail sales and investment in capital goods, such as machinery, shrank at a slower pace than expected.
Betty Wang, senior Chinese economist at investment house ANZ, commented that “if the recovery momentum continues, China could avoid another GDP contraction in the second quarter”.
China are further ahead of us on the economic recovery curve and there is talk of further stimulus to prevent this progress from stalling. It is likely that this will be replicated across all the developed economic nations which should, in turn, boost investor confidence.
Reasons to be cheerful?
Personally, I think there is. There will be bad headlines but there’s always bad headlines… the press has just got more too choose from!
My advice, as always, is ration how much news you consume as it’s amazing how much better you feel for it.
Have a lovely sunny weekend.
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.