Multi-Asset

Global market update – 24th April 2020

Paul Niven – of our Multi-Asset team – offers an update on market events.
April 2020

Paul Niven

Managing Director, Portfolio Manager and Head of Portfolio Management, Multi Asset Solutions

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Risk Disclaimer 

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

A little over two months ago, global equity markets were trading at all-time highs and investors appeared confident that 2020 would see a further extension of the positive growth backdrop that had helped to fuel the longest equity bull market in history.

Since mid-February, however, investors have endured a nauseating ride in markets, with the highest levels of volatility ever seen and a rapid move from bull to bear and back, once again, to bull market. The precipitous drop in markets, which wiped around a third of the value from global equities, was the fastest ever seen and the recovery, where some of the major stock indices have bounced by over 30%, was also a move of unprecedented speed.

The scale of the moves seen in markets corresponds to both the extent of damage being wreaked on the global economy through current lockdown measures and the tremendous size and speed of policy response, from both a monetary and a fiscal perspective. On the former point, we know that the current economic downturn will exceed anything seen for almost a century. But we also can see that the response from central banks and governments is intended to reduce the longer-term fallout from the widespread cessation of many forms of economic activity.

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Revisiting our observations

A month ago, we outlined four factors which may enable a floor to be reached for equity markets. These were:

  1. Aggressive policy action in the form of both monetary and fiscal measures
  2. Valuations pricing in a substantial downturn in corporate earnings
  3. Peaking volatility – which tends to precede a market trough
  4. Peaking in Covid-19 infection rates

 

In each case, we have seen substantial progress and, in a number of instances, the newsflow has (positively) surpassed expectations.

 

Policy action

Certainly, not only the cuts in interest rates but also the sheer scale and breadth of asset purchase programmes, particularly from the US Federal Reserve, have been a positive surprise. Furthermore, the extent of measures to underwrite both credit and wage risk in the global economy have also been taken positively.

 

Valuation

On valuations, markets have bounced back very strongly but, at the lows, they were arguably (and rightly) pricing in a reasonable recession. They are now pricing in a return to growth, certainly for 2021.

 

Volatility

Volatility remains high by historic standards but has declined. As markets fell sharply and volatility spiked, certain investors were compelled to de-risk, creating a downward spiral in prices. The risk of a disorderly meltdown has receded and markets are, for the time being, demonstrating both relative resilience and calm.

 

Infection rates

While the human cost of the Covid-19 outbreak continues to be terrible, there are encouraging signs that infection rates are peaking and that lockdown measures are working. Furthermore, while we remain a long way from normalcy in our daily lives, the discussion has moved towards how and when economies can start to re-open. Indeed, next month it is likely that many major economies will tentatively start on this path. In addition, over 80 potential vaccines have now been identified and a number are currently undergoing trials, raising hopes that, alongside more effective treatment options, a medical solution may soon be identified (even though it would take quite some time to become widely available).

 

The reality of the downturn sets in

Having had incrementally positive newsflow over the past month, markets now face the uneasy prospect of dealing with the reality of the downturn. Macro indicators, including from the labour market, are now corroborating why economists’ estimates suggested that developed economies may show double-digit declines in GDP over the course of the second quarter. Furthermore, corporates are withdrawing earnings guidance and reporting huge hits to revenue and profits, alongside widespread suspension or cessation of dividends and buybacks. While markets have so far remained relatively impassive in the face of the onslaught of negative reports, this may well become more challenging in the near term as the scale of economic and corporate destruction is laid bare.  Expectations have adjusted sharply; reality may well still bite.

 

Use our handy glossary to look up any technical jargon you are unfamiliar with.

Markets now face the uneasy prospect of dealing with the reality of the downturn.

Looking forward

It is clearly impossible to predict with confidence what the economic and corporate backdrop will look like over the next year. Nonetheless, with positive newsflow on infections and a strongly supportive backdrop from policymakers, we should see a return to growth later this year. Certainly, this is what markets currently expect. No-one is assuming an immediate return to the pre Covid-19 world and it is widely anticipated that social distancing measures will reduce activity in certain areas for the foreseeable future.

When looking to make predictions over the longer-term implications of Covid-19, it is tempting to extrapolate current experiences far into the future. In a number of instances this will likely prove to be the correct conclusion, but this may largely be due to the deep recession and lockdown measures acting as an accelerant to existing trends. For example, the move to online retail and consumption was already well entrenched. In other areas, such as airlines, there is a tremendous challenge over a potential secular change in demand. For property, if home working becomes more embedded, even on a part-time basis, this may materially reduce demand for prime office space, while commercial will likely suffer from ongoing trends in the retail sector.

With positive newsflow on infections and a strongly supportive backdrop from policymakers, we should see a return to growth later this year.

What can history teach us?

The lesson from recessions is that the stronger companies with better business models and dominant market positions will tend to fare better during recession and post recovery. There is every likelihood that lower quality and more cheaply priced stocks will enjoy a recovery when growth resumes. Companies with a weak balance sheet or market position will, however, lose out to dominant incumbents who will be relatively strengthened by the downturn. This should be true both across and within sectors – even within those sectors which face secular challenges such as airlines and travel companies.

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