Walking a tightrope
- Covid-19 now a global pandemic. A third of world population in some form of Covid-19 lockdown measures.
- Global recession now anticipated in Q1 and Q2 2020.
- The FTSE suffers its worst quarter since 1987.
- UK government announces largest fiscal loosening for 30 years to support economy and jobs.
- Social distancing, self-isolation and working at home measures in place across the globe.
- Crude oil slumps after Saudi Arabia ramps up production. Russia refuses to lower oil production. Covid-19 has reduced oil demand by 20%.
- UK introduces a ‘furlough’ for UK employees covering March to end May whereby employees receive up to £2,500 per month to stay at home.
- China's March PMI, at 52 indicates growth and significantly improved from 35.7 in February.
- US approves a $2trn stimulus programme, including ‘helicopter money’ that will see every adult American receive $1,200 plus $500 for each child.
- US Federal Reserve reduces the Federal funds rate to between 0%-0.25%.
- Bank of England cut the Base rate from 0.75% to 0.1% and launches new £100bn Term Funding Scheme. Forthcoming bank stress tests have been cancelled.
- China – Wuhan, original epicentre of Covid-19, to come out of lockdown on 8th April.
Overall, markets still finished March firmly in the red. The selloff in the oil market was particularly severe, down some 50%, as OPEC+ failed to reach agreement on cutting supply, even though demand was significantly curtailed by the impact of the coronavirus lockdown.
The speed with which coronavirus has spread globally and the scale and implementation of lockdown measures have been staggering, as governments have raced to stop their health systems being overwhelmed. At its peak, 40% of the world’s population was under some form of containment. What started as a Chinese issue has spread into a global pandemic that will result in global recession, as economies around the world shut down.
Support from central banks and governments has been enormous, with the Federal Reserve unveiling open-ended quantitative easing and governments launching actions that are unprecedented during peacetime. With huge swathes of the economy forced to shut down, such policies are a necessity to try to absorb the worst of the damage, as businesses are forced to cut costs where they can, with sales literally disappearing overnight.
There is clearly much to be mindful of, however cautious optimism can be drawn from the situation in China, where life appears to be returning to some form of normality. Economic data revealed that the Chinese manufacturing sector has moved back into expansion. It remains early days, but this in combination with the low number of domestic coronavirus cases is reassuring.
Italy, a key early hot spot in Europe, also appears to be showing an improving trend in new cases. However, attention has rightly fallen on America, where authorities appear to have been completely wrong footed in their initial response, as demonstrated by the President’s declaration that people would be in church for Easter. However, there are early signs that countries across Europe are tiptoeing toward a loosening of the strict lockdown measures. Unfortunately, the next phase is not a straight line to normality. It will be restricted by rules due to a pandemic still present - this could take many months.
Markets appear to be pricing in 3 months of maximum lockdown pain, but the million-dollar question is how soon does life return to normal? The phrase ‘walking a tightrope’ comes to mind. This will apply to all governments and everyone will be watching China closely, given it was ‘first in, first out’ of the coronavirus crisis.
Companies and households clearly face a very difficult period, nevertheless stock markets have experienced material falls already, having digested a lot of bad news, including widespread dividend cancellations. It remains to be seen how long the lockdowns will last for and how governments will roll back containment measures.
The support that has been unveiled has attempted to keep economies in a state of suspended animation, preventing an outcome that could have been much worse. The key will be achieving as quick a lockdown as possible without setting the foundations for a second round of the virus and as such, the progress in China is being very closely monitored.
We continue to closely monitor developments. Overall, we believe that the portfolios have held up relatively well all things considered, nevertheless they have not been immune to the market weakness. We continue to believe the investments held remain well placed to deliver long-term returns.
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