Looking forward

As we go into the Easter Weekend, we suspect this is very different to what many were expecting. We continue to engage with fund managers and investment specialists and below are key messages from these discussions.

Some interesting thoughts from GAM and Miton express this as a shock to the global economy and very different to other crises, and Investec highlight things to consider post COVID19. Varying views also remain of the type of recovery.

Fidelity (Economic Team)

Reasons to feel positive:

  • Volatility within the markets has dropped back in recent days
  • More optimism around the curves; Austria is relaxing some of the lockdown measures

Turning to Asia:

  • China continues to return to normality
  • In Singapore there have been a very low number of cases, but these have increased as people have returned to the country
  • Fatalities have been significantly less across Asia perhaps due to prior experiences, public attitude, policy response, and screening at airports

What to look for:

  • Likely to be challenges as economic data feeds in
  • How countries manage the process, and how they come out of this

GAM (European Team)

There have been three shocks to the global markets this year:

Shock 1 – Exogenous – Coronavirus

Shock 2 – Exogenous – Oil price

Shock 3 – Endogenous – Market disruption

In terms of each

Shock 1 – caused a deep economic shock, un-paralleled to anything seen in modern history

Shock 2 – this is battle between Russia and Saudi Arabia, where oil production has gone up and prices discounted

Shock 3 – this saw a spike in equity volatility, disruption in US treasury bond market which led to equities and bonds all falling at the same time, and a substantial and erratic fall in asset prices

Where are we now:

Shock 1 – many economies are in lockdown and we are seeing unusual and innovative fiscal policies. Some countries aiming to protect businesses and jobs

Shock 2 – they expect this to be ongoing

Shock 3 – central banks have moved quickly, and markets seem to be more focused on the right fundamentals

What to look for:

  • If employers can protect jobs, and although people will earn less, they have nothing to spend it on. Once lockdown restrictions are lifted does this create a pent-up demand for people to spend and is that what gives the v shape recovery many are talking about
  • Global GDP for this year will be negative but the shape of next year will likely depend on:
    • How long it lasts – they do not believe in an 18-month lockdown which would destroy the global economy, they expect these to be lifted towards the end of Q2 and Q3 for the more restricted areas like air travel
    • How economies behave after the lockdown – China consumption has bounced back, will the same happen across the west
    • How successful is the economic bridge – if the fiscal policies work then we can expect a very strong bounce back, if not it will be much longer
  • What restrictions are lifted, and when. International air travel is likely to be the last to be lifted

Miton (US Team)

Like GAM they see this as being driven by three shocks:

  • Virus
  • Oil Price
  • VIX

The Virus and Oil Price started the downturn in markets, this then forced the VIX Index (volatility) to spike; as the VIX Index spiked this started machines to automatically sell, forcing the VIX to spike higher. VIX has now come down and the reverse happens, where machines start buying.

The view from the Miton US team is that they feel they reached the market bottom faster and potentially overshot where the market should have arrived at due to this anomaly. Markets could go down further but they believe this would happen only if there were multi-year earnings downgrades (2021, 2022).

They believe Q2 will be bad but Q3 will show signs of recovery with Q4 being stronger.

Signs to look for:

  • The world has placed economies into induced comas and will do anything to get them back to life. Watching what central banks and governments do is important
  • Can corporates get finance to survive? Carnival has recently secured debt funding which is a positive sign
  • Watching indicators like the cost of insuring debt which spiked up indicating corporate failures, and has now started to drop back
  • Corporate bond spreads which have started to come back down
  • Market sentiment which is currently at levels of 2008/2009 although it has dropped back very slightly

What happens next:

  • There needs to be a medical solution and they believe there will be better information about this in the next couple of weeks
  • Eyes will turn to economies – production indicators, bailouts, impact on labour, business and consumer confidence
  • They believe there is a wall of cash waiting on the side lines and as more positive news comes in this could be put to work in the markets
  • Near term we should expect lower interest rates and high government spending. Long term more uncertain but we should look to areas like higher taxation, higher inflation and interest rates
  • They believe the next bull market will be very different to this market, could be small cap that drives it but likely to perhaps more akin to old style bull markets (boom and bust)

BMO (Economic Team)

Thoughts:

  • Markets seem to be starting to see light at the end of the tunnel but are they pricing in earnings disappointment?
  • What about the second-round effects:
    • Unemployment – the aim is about protecting jobs; in the US it took 6 months for 10 million to register as unemployed in the Financial Crisis of 2008/2009; it has taken just two weeks in this crisis
    • They believe it is impossible for a company to provide any indication of future earnings within this environment; companies are already filing for administration, and some are stopping or deferring dividends
    • Virus comes back – does the world go back into lockdown, and the economic impact of this
  • The exit strategy from lockdown will take time; but we will recover, this is a shock and this clouds and colours people’s thoughts – fiscal stimulus likely to continue past the exit strategy and there will be opportunities
  • There are many uncertainties now and they do not believe in a v shape recovery. Much will depend on the consumer and unemployment numbers. Consumer confidence is at record lows, but once we come out of lockdown does that change. If the consumer is nervous, they won’t spend which is what the economy will need
  • Bounces in the market from the lows is common, they expect this to fall back once earnings data from companies comes out
  • Longer term they think Asia will lead the way, they are negative about the bricks and mortar commercial property market especially retail and office, they think low oil prices will keep inflation low in the short term, but longer term NHS pay rises, supply shortages etc will push up inflation over a 2 to 3 year view

Investec (Economic Team)

Beyond COVID19

  • They think any deal on leaving the Eurozone will be pushed back, perhaps up to two years. This could be positive for sterling
  • They think the US/China trade tensions could escalate especially with Trump calling this a Chinese Virus
  • Concerns over the US election with Trump not having a strong economy and what this will potentially mean for the result

Things to watch out for:

  • Singapore have reported GDP to the end of March, and this is the biggest fall since 2008/2009, China to report next week and Europe the end of April
  • They think markets are pricing in a v shape recovery on the basis that economies normalise quickly with the fiscal stimulus around protecting companies and jobs, negative sentiment could therefore impact markets
  • Areas of weakness coming out the recovery they see as retail shopping areas, office space and leisure (restaurants, cinema etc), they are unsure how this might impact any recovery
  • Inflation in the short term is likely to be low, but longer term this could spike
  • Interest rates are likely to remain low for a long time to avoid damaging any recovery

Jupiter (Merlin and Economic Team)

Words of warning:

  • Bear markets can make fools of all of us, they can suck you in and destroy your money
  • There is a risk of a prolonged U shape recovery – the longer the curtailment, the greater the risk more companies don’t survive
  • They are concerned about escalating trade tensions coming out of this, and what this will mean for supply chains
  • Will international travel ever return to its peaks, especially business travel
  • Concerns over increased infighting within the Eurozone
  • Expecting dividends to decrease at a conservative level by 15% to 20% (Banks have suspended, others include Rolls Royce and Cineworld)
  • Spanish flu was 2 years, we are only weeks into this
  • In the UK if the money doesn’t get to companies could we see a big spike in unemployment and collapsing businesses

Points of interest:

  • Super charged themes include quality, defensive sector of technology, certain sectors of pharma and digital experiences
  • Sectors likely to be challenged include utilities, some retail and leisure

Looking to the recovery:

  • China unlocking, Austria and Germany talking about unlocking. France looking at adding additional measures and Sweden has virtually no lock down
  • Expecting global economy to shrink between -3% and -6% for the full year
  • In the UK it is not clear how the debt will be repaid – austerity, inflation, tax – there is no reset button
  • They think we will be living with the impact of this both economically and socially for a generation
    Could move into a post war environment – this article is interesting click here

JP Morgan (Economic Team)

  • Appears Italy, Germany and Spain are rolling over. Need a clear shutdown exit strategy – proposed dates in Europe are France (15 April), Germany (20 April), Spain (26 April) and Italy (4 May)
  • They expect Europe to come back quicker than the US
  • Earnings down grades are coming in, but they are concerned these don’t fully reflect the potential hit to profits – US downgrades in 2020 are expected to be -12%, Europe -13% and UK -17%
  • Not sure that equity prices reflect the cessation of buy backs and dividends
  • They believe there is still downside risk, but the long-term opportunities remain positive
  • Short term they think we will see negative inflation but inflation will have to come back to inflate away the large levels of debt – the other routes are austerity and tax and no government is going to want to turn to those – so we expect higher inflation long term and this tends to be better for equities
  • Value opportunities will open up in equities especially where dividends are stopped, but where these companies are likely to be a high dividend payer in the future (an example would be financials)
  • Need to watch carefully the labour figures especially in Europe where fiscal policy is aimed at protecting jobs. In the US the actual benefit is a basic payment of $385 plus a top up of $600 therefore paying $985 per week for up to 39 weeks and hence the higher levels of unemployment (some people earning more from benefits, so when they get jobs will they go out and spend)

Additional soundbites

Clear Bridge (Anatomy of a recession)

Anatomy of a recovery (US) – current position.

  • Confidence – consumer (recession), business (recession), investor sentiment (yellow)
  • Economic – building permits (recession). Initial job claims (recession) and Philly Fed (caution)
  • Financial – credit spreads (recession), Fed Policy (expansion), financial conditions (recession)

Looking at these indicators they want to see recession indicators move to caution and then to expansion. They will be updating these, and they will provide some indication as to when we might come out of this recession.

They worry about counter trend rallies. Between 2007 and 2009, there was a counter trend rally of 12% in 2008 which lasted 51 days, and then again in 2009 of 24% which lasted 31 days before it went down again. So, they are just flagging investors should be cautious.

Long term they think based on 90 years of history we are in a secular bull market and therefore although there will be bumps in the road the markets could potentially go much higher over the next ten years.

(1930 -1950, cumulative returns -22.2% from 1950 to 1970 the return was +451.9%. From 1970 to 1980 the return was +17.2%, the next twenty years the returns were +1,261.2%. From 2000-2010 the returns were -24.1%, we are ten years in and therefore they think this has ten more years to run).

Templeton (Emerging Markets Team)

  • They do not believe this will be a global depression due to the unprecedented stimulus by central banks, G4 central banks to expand balance sheets by over $6.8 trillion. G4 (US, Eurozone, Japan, UK) plus China fiscal stimulus is over $3.2 trillion
  • Key message – this time will pass, markets will recover
  • Characteristics of Asian Companies very different to the West. Top 100 companies’ ex Financials – 57% of Taiwanese, 50% of Japanese, 48% of Chinese and 38% of Korean Companies have net cash. In the West 33% of German, 21% of UK and 18% of US Companies have net cash
  • There is a big shift in Asia to new economy which now dominates markets – consumer discretionary, consumer staples, IT and communication services. The speed of adoption to adapt to situations like COVID19 are ahead of the West, a good example is online education

Schroders (Economic Team)

  • They think that Europe will take a bigger hit to GDP compared to the US, but that Europe is better positioned on the rebound because of the fiscal policies they have. US firms will actively have to go out and re-employ people which will take time
  • They have increased their assumption of a w shape recovery to 35% based on the experiences in China. Singapore and Hong Kong where some restrictions have come back into play
  • They expect to hear more about MMT which is central banks printing money and giving directly to people to spend

Artemis (European Team)

  • Early positive signs with Austria, Denmark, Norway and Czech Republic starting to come out of lockdown. Italy, Germany and Spain all set to follow

Invesco (Economic Team)

  • Many think the US will drop into a depression because unemployment is higher. They think unemployment could be as high as 20/25% but this will be for months, in the depression it was for 2 years plus. Their base case is that this will not be a depression but a recession with either a v or square shape recovery

T Rowe (Asia Team)

  • Although China is gradually getting back to normal, concerns of the impact if the lock down in the West goes from a few weeks to a few months, and they are seeing exporters having orders cancelled which could slow any recovery
  • Globally April is the critical month with a lot of information coming in and this will help navigate a way forward, although things will open up, they believe international travel will take much longer to return to normal

 

Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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