Six months to end June 2020
Equity prices around the world were extremely volatile during the period with the UK market ( 19.6%) registering a sharp fall whilst Overseas markets delivered a small rise in sterling terms (+0.5%). The optimism seen in the closing weeks of 2019 maintained its momentum at the beginning of the year. However, any progress that had been made started to unwind towards the end of January as details of the coronavirus outbreak began to emerge with further dramatic falls occurring throughout February and March. A recovery in share prices took hold in the second quarter of the year as investors responded to various measures put in place to support economies around the world. Fixed Interest investments (+8.6%) strengthened during the period as investors sought ‘safe haven’ assets.
In the US, equity markets made steady progress until mid-February, when the impact of COVID-19 began to be felt, initially in New York before spreading across the country. The US elections are now very much in sight, but there is no doubt that the strategy for dealing with the virus and its impact on the US economy is regarded as a crucial factor in voters’ minds, particularly as a number of areas have had to re-introduce lockdown measures.
In Europe, high levels of trade with Asia, and China in particular, has meant that European manufacturers found themselves very exposed to the negative effects of both the US/China trade war and then the effects of the travel lockdown in China. The gradual spread of the coronavirus added to the heavy economic burden. As in the rest of the developed world, central banking activity was initially focused on adding liquidity to support the markets, and a bias in the Eurozone away from technology and towards the banking sector has left the ECB with a challenge to stabilise and stimulate economic recovery.
The confidence which had started to build in the UK market was dealt a blow in February and March, as COVID-19 began to take its toll on business activity, and the period of lockdown began in earnest. The first tentative steps towards reopening parts of the economy in recent weeks are being made in an environment of logistical challenges of distancing. Both employers and the self-employed are watching closely the level of support to be offered by the Government as companies transition away from the furlough arrangements.
Asia & Emerging Markets
Just as China was the first to battle COVID-19, so it and many of its neighbouring economies are in the vanguard of the recovery. China is also demonstrating a willingness to throw considerable weight behind its domestic economic stimulus, and has taken the unusual move of stepping back from its ambitious GDP growth targets. Diplomatic tensions with the West, however, over trade as well as the status of Hong Kong, demonstrate that China is far from immune to international pressure. The poorer economies have also experienced real difficulty with the stresses of coping with the virus, and the possibility of default on national debt is a real prospect in several emerging markets.
The alarm caused by the global virus has been severe and the market impact brutal. In financial terms, initial decisive moves, such as the swift cuts to interest rates by the Federal Reserve and a concerted effort by the UK Treasury and the Bank of England to rebuild financial stability, proved helpful to sentiment. The unprecedented move by the UK’s Chancellor to guarantee 80% of the salaries of furloughed workers in the first instance and a tapered support from August to the end of October has given businesses a much-needed lifeline, though many are acknowledging the need to show restraint in rewarding shareholders at such a time, and dividends are being widely cancelled or suspended.
The European Central Bank is seeking to address in federal terms a wide range of differing pressures; Italy, for example, relatively lightly exposed in international trade terms, moved swiftly to draconian lockdown levels to protect its ageing population. Germany, on the other hand, only narrowly avoided recession, due to its manufacturing industries’ heavy reliance on Asia; but with a well-invested healthcare system, is better placed than much of the developed world for the challenges of dealing with the virus and indeed is actively supporting less well-resourced neighbours in the relief effort.
It is likely that further policy measures will be required to combat the effects of the coronavirus outbreak on the global economy, with the US in particular pledging trillions of dollars to the cause. Recent stimulus measures have been firmly positioned outside the boundaries of previous fiscal rules, demonstrating the willingness of leaders in the developed world to use all means available to address the challenge in attempting to provide essential short-term stimulus, while mindful of the longer-term needs of the economies they seek to manage. How quickly the outbreak will be contained, whether a second or third wave of infection can be avoided and how long lasting the economic effect are unanswerable at the present time, though there are signs that countries which moved swiftly to contain the virus are past the peak of its impact.
Markets have begun to find firmer footing as the shape of COVID-19’s impact on a global scale becomes clearer; day to day volatility is less dramatic and businesses are starting to develop viable plans for the limited reopening of trade. Focus will then move to the level of fiscal and monetary support that had been required to control the human cost; and at that stage, the shape of the recovery should start to be revealed.
Murray Asset Management UK Ltd July 2020
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*Based on the representative indices.