It is now nearly 4 weeks since the UK entered lockdown in response to the impact of COVID-19. Last Thursday the UK Government extended the period of lockdown until the 7th May, with the possibility of a further extension, subject to the progression of Coronavirus within the UK population and the ability of the NHS to be able to cope with the number of cases requiring hospitalisation.
Last Thursday was also the day that the US unemployment filings reached 22 million, which ended a very difficult week for the US in combination with the levels of the infection and mortality rates being reported. The International Monetary Fund (IMF) also published its report “The Great Lockdown” last week which predicted the biggest slump in global growth since the 1930’s with an expectation that 90% of the countries in the world will see negative growth in GDP this year. All in all a very grim 4 weeks.
Amongst all this gloom there are also some positive indicators that should be recognised. Scientific evidence indicates that infection rates may have passed the peak in Europe and are starting to show signs of levelling in the US.
In Spain, Italy and Germany the Governments have either started or are about the start the process of opening up their economies again as has been done in China and South Korea. Technical indicators such as the price of Copper and the Dow Jones Transportation Index, which are reliable indicators of business activity, have recovered above levels that would indicate expansion. Stock markets across the globe have also exhibited a remarkable recovery in valuation levels since the lows reached around the 22nd and 23rd March. As an example of this the FTSE 100 Index was trading at 4993.90 on the 22nd March. As of the opening on the 20th April the FTSE 100 Index was trading at 5786.96, an increase of 15.88% over the period in question. Gita Gopinath, the Chief Economist of the IMF, has also highlighted an expectation of a 5.80% growth rebound in the global economy in 2021 as demand is predicted to recover dramatically post-lockdown.
It is too early to get blasé about the scale of the public health journey that still has to be navigated and the so called “exit strategy” has also to be formulated with appropriate oversight and assessment procedures put in place to ensure we do not suffer a second wave of infections.
Looking forward, our market expectation is that the continuation of social distancing measures will continue to reduce the infection rate. Based on the patterns seen in China and South Korea the number of cases would peak in the middle of Q2 and a lifting of the lockdown would happen by the end of Q2. The recovery would probably begin at a modest rate due to supply side disruption but a combination of pent-up demand underpinned by the Fiscal and Monetary stimulus provided by Governments and Central Banks would accelerate the recovery from Q3 onwards.
The hope would be that economic activity would be back close to pre virus levels around April/May 2021. Early development of an effective treatment protocol, pending the arrival of a usable vaccine, could bring the recovery period forward but failure to get on top of the infection transmission could elongate lockdown measures which would impact any economic recovery.
Scott and I have recommended through the process that clients stay invested to be in a position to participate in the recovery as it builds momentum. As proof of this view I would point to the aforementioned increase in the FTSE 100 Index which we believe underpins the value in taking the long view on equity investment. Volatility has not left this market and there will be days when being invested may feel uncomfortable.
We are right at the beginning of the Q1 Corporate Reporting season and the earnings picture is already looking poor and is anticipated to look even worse when the Q2 figures are released at the beginning of July. This has the potential to cause markets to take a step back and we should expect some heightened volatility at that time. Taking the long view, history has shown that staying invested and looking past this short-term volatility is the correct course of action.
As has been mentioned in previous communications Scott and I are available to provide specific advice and guidance so please do not hesitate to make contact and we hope you and your loved ones stay safe.
Kind Regards
Alan & Scott
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