Quarter 1 2020 Market Review and Quarter 2 2020 Outlook
The global economy is currently experiencing a unique and devastating shock because of the coronavirus spread and this was reflected in sharp falls in equity markets. In the UK, the FT All-Share fell by 25.1% in Q1 2020; while the FTSE All World dropped by 15.9%. In individual markets, the US S&P 500 dropped by 14.1% in sterling terms and Japan was down 11.2%. Larger falls were Europe ex UK, which declined by 17.3% and Emerging Markets with a drop of 19.0%.
UK Gilts gave a good return of 6.3%, with indexed linked gilts rising by 1.6%. The inevitable worries about corporate failures weighed on the corporate bond sector, which fell by 5.6%.
Inevitably we have also seen a strengthening of the dollar in a flight to liquidity and safety.
At this stage it is difficult to predict the final outcome, but it is possible that this could be both the deepest and (hopefully) the shortest recession in history. It is also a very unusual recession for a number of reasons:
Firstly, it has been brought on by governments, who have responded to the spreading virus by stopping social and economic activity, in order to try to avoid health care systems being overwhelmed by the sheer number of patients; particularly as in many countries the facilities to fight the virus are limited.
Secondly, it is different because recessions normally occur because of economic or financial shocks, whereas here we have a recession caused by a factor from outside this sphere in the shape of this highly contagious virus.
A second negative for the equity markets, particularly the UK market which is heavily oil biased, has been the row between Russia and Saudi Arabia which has caused a collapse in oil prices to the US$25 level. Comments from President Trump, who has spoken to both sides, caused a sharp rise in oil prices to around $35 per barrel, but this seems to have been temporary as Brent crude has dropped to minus $0 amid gloomy forecasts of demand.
Fortunately, both Governments and Central Banks have reacted quickly. Both the US and the UK delivered emergency interest rate cuts, although these will have a limited effect as on this occasion interest rates were already extremely low. What is likely to have much more effect are the UK Government's promise of £330bn of loan facilities and grants of 80% of wages up to £2,500 per month so that companies do not have to make employees redundant. In addition, both the European Central Bank and the Bank of Japan have joined the Fed in restarting their quantitative easing programs; which in the case of the Federal Reserve will, for the first time, include corporate bonds.
One of the main uncertainties is now how much longer will the current lockdown continue here and elsewhere? A deep recession is inevitable given the shutdown of economic activity across the world, but governments have reacted swiftly so far, and this should support economic recovery once the current restrictions begin to be lifted. In fact, the recovery, when it comes, could be significant, because of the need for restocking. In addition, many companies may rethink their "just in time" supply policies and decide it is prudent to build up extra stocks in case the virus re-emerges or there is some other shock to their supply chain. It seems certain however that both public and private sector debt will be very much higher at the end of this crisis.