Last week – the week of 6 April – saw positive market sentiment and markets rise in value with the narrative focused on the slowing rates of growth in the number of new COVID-19 cases in parts of Europe and the US, enabling attention to shift to possible exit strategies from the lockdown and economic activity being kick-started. Unfortunately, we believe markets are being overly optimistic. Economies will struggle to reopen fully anytime soon given the need for increased hospital capacity, widespread testing, improved patient treatment, and, ultimately, the delivery of a vaccine.
The key indicator to monitor remains the growth in cases in different countries, as that will indicate if countries are getting this virus under control and potentially how long countries will have to remain in shutdown.
In terms of global institutions, the IMF and World Bank hold their spring meetings (via video conferencing) this week. The IMF’s semi-annual World Economic Outlook was published on 14 April and included its view that the global economy is projected to contract sharply by -3% in 2020, much worse than during the global financial crisis, but even then only if the pandemic fades in the second half of 2020. This mirrors the minutes from US Fed’s 15 March meeting that revealed they envisaged two economic scenarios: (1) a calmer outbreak that brings an economic recovery in the second half of the year; and (2) a more adverse scenario which would mean the rebound would not get underway until next year. The minutes also flagged the view that the coronavirus slowdown is different to the global financial crisis in that impact is seen as temporary and the US banking system is healthy.
In terms of economic data, the focus remains on weekly US jobless claims data published each Thursday as it is the most real time economic data. We will also get a big economic data dump from China with Q1 GDP numbers expected to show a decline of -5.8%. March industrial production and March retail sales are released on Friday for the EU and US.
Q1 earnings season is also starting this week with 33 companies in the S&P 500 reporting. In the UK, close to half the companies listed on the stock market have announced dividend cuts or suspensions, although we view this as largely sensible under the circumstances.
Notwithstanding last week’s better run for risk assets, we remain concerned regarding the high level of uncertainty on the future path of the virus, as well as the length and extent that the global economy will be disrupted. Further volatility seems likely, and we believe the notion of a quick ‘V-shaped’ recovery is now wishful thinking on the part of some investors.
Until satisfactory progress has been made on a deployable vaccine and/or more effective treatments, we should expect a series of partial lockdowns and reopenings around the world. While the number of cases and deaths appears to be peaking in some of the more closely followed locations, the virus will remain a threat.
The immediate outlook is for more very poor global economic data releases. Companies Q1 earnings reports over the coming weeks are likely to show some of the damage already sustained. Any guidance company managements provide is likely to be highly conservative – CEOs, like everyone else, do not have crystal balls and don’t know how things will unfold.
Now, more than ever, it is crucial that we make use of the experience and knowledge of our investment professionals and continue to stick to our evidence-based investment process. I can assure you that this is what we continue and will continue to do.
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