- Through April, global equity markets have fallen by 13.5% year-to-date, with disparate performances across regions and sectors.
- According to the IMF we face “the worst economic downturn since the Great Depression.”
- Investors are closely monitoring how the emergence from lockdown proceeds.
Despite everything, there is hope
The April rebound in equity markets was in part the result of investors responding to the numerous economic support measures that were further reinforced during the month.
What markets do next will depend on the shape of a recovery that’s still hard to gauge.
After the economic collapse there is still hope that because the economy was fundamentally healthy beforehand, it can more than make up for lost output in the second half of the year.
Reports that industrial production in China was restarting enabled investors to weigh up the effects of the social measures and medical emergency declarations elsewhere in Asia, particularly in Japan.
In many Western countries, governments began to discuss how to go about gradually lifting the lockdown in April or May.
Contributing to positive performance in equities was the implied easing of travel restrictions signalled by slightly more encouraging news on the medical front. The good news included a slowing in the number of new infections and deaths, particularly in those European countries, such as Italy and Spain, hit hardest by the pandemic.
In the US there was a stabilisation of contagion – albeit at high levels – towards the end of April.
Even though research into treatments and vaccines remains at a very early stage, some of the news flow appeared promising to investors.
The equity rally in April was widespread across developed markets. Major indices rallied to their highest levels since 10 March.
US markets outperformed: +12.7% for the S&P 500, +15.4% for the Nasdaq, boosted by the growth of the Internet giants, whose stock-market valuations have fallen by just 0.9% since the end of 2019.
The Nikkei 225 index gained 6.7% and the EuroStoxx 50, 5.1%. At the global level, cyclical sectors tended to outperform at the expense of defensive stocks and financials. Consumer cyclicals and energy led the way.
Horrendous economic indicators
With some glimmers of hope on the news front, equities haven’t suffered in recent weeks from the accumulation of strongly downbeat economic indicators as they otherwise might have.
The release of first quarter GDP estimates in the US and the Eurozone did however contributed to a fall in markets at the end of April.
As the month progressed, indices reflecting business surveys – which had already tanked in March – continued to collapse, particularly in the services, trade and hospitality sectors.
Consumer confidence fell heavily as unemployment began to rise sharply.
The International Monetary Fund’s (IMF) latest World Economic Outlook, entitled ‘The Great Lockdown’, forecasts the “worst economic downturn since the Great Depression”.
The IMF anticipates a 3% contraction in the world economy in 2020 (-6.1% for developed economies), and said that ‘much worse results are possible and perhaps even likely’.
A rebound is expected in 2021 (+5.8%) but this would still leave GDP below the pre-virus trend.
Collapsing global demand led to a plunge in oil prices, exacerbated by technical factors in te West Texas Intermediate (WTI) futures market. The price of a barrel of crude fell below zero on 20 April before edging back to finish the month at USD 18.8, down by 8% from the end of March. Brent crude ended the month above USD 25/barrel, up by 11% for the month, while a cut in production of nearly 10 million barrels/day by OPEC and its main partners (OPEC+) is expected to come into effect on 1 May.
Learning to live with the virus
Announcements that lockdown measures may start to be eased from April or May were well received by investors in April. Their attention now looks set to focus on the practicalities of these exit strategies and their consequences for public health.
People and businesses have already realised that they will have to learn to “live with the virus” (limitation of certain activities, travel difficulties, bans on large gatherings, wearing of masks, etc.).
Investors, who in recent weeks have seen an unprecedented deterioration in economic indicators, will have to take on board the fact that coming out of lockdown will not mean a return to previous norms.
The extraordinary policies implemented in March and April, aimed at ensuring the normal functioning of financial markets and supporting economic activity, have proved effective, despite some difficulties, notably on the fiscal side.
Central banks are giving assurances that they are determined to do more if necessary.
Governments must now propose stimulus packages, while assessments of the economic consequences of the pandemic – the extent of the recession and what the recovery will look like – remain largely guesswork.
Second wave of lockdowns is main downside risk
In the context of a gradual recovery in economic activity in the coming months, news on the medical front (large-scale testing, research progress on vaccines and treatments) is likely to be one focus of investors' attention.
Chinese data shows that recovery can be rapid in the industrial sector and more hesitant for consumer cyclicals and investment.
For risky assets, the main downside risk is that new, or longer, periods of lockdown would prolong the global recession. A more favourable scenario would be one whereby the world gains a faster, more complete control of the pandemic, which would enable a “good reflation” of economies.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.