In terms of exit strategies, Europe’s largest economies began to chart ways out of lockdowns, with varying degrees of detail. Italy, for example – once the epicentre of the virus – has a timetable between 18 May and September for different developments. In the US, meanwhile, eight states have eased restrictions, allowing some businesses to reopen, while enforcing social distancing rules. For example, South Carolina’s retail stores are only allowed to operate at a 20% capacity.
In terms of treatments becoming available, markets responded well on Wednesday 29 April to the US trial of Gilead Science’s remdesivir, which saw patients recover quicker when taking the drug versus a placebo – an improvement on the Chinese trial, which found the drug to be ineffective. Given the US trial had four times as many patients as the China study, the Food and Drug Administration authorised its emergency use.
President Trump escalated tensions between the US and China at the tail end of last week. He threatened to impose new tariffs on China over its disclosure and handling of the coronavirus, rumours that the virus started in a Chinese lab, and his view that the country is trying to stop his re-election.
With regard to Q1 corporate earnings, Amazon warned that Q2 earnings could be anywhere between a US$1.5 billion profit or a US$1.5 billion loss. Alongside Apple’s decision to withhold guidance for the current quarter, this raised fresh concerns over the impact of the global health crisis on businesses.
Oil prices rose last week on the back of optimism that the reopening of some economies should gradually rejuvenate oil demand.
On the economic data front, the US’s weekly initial jobless claims came in above expectations, increasing by 3.8 million, and bringing the total number of initial claims in the last six weeks to over 30 million. Meanwhile, Q1 GDP saw a contraction of 1.2% quarter-on-quarter, although the US was one of the last economies to introduce containment measures and so the Q2 number will almost certainly be much worse.
The Eurozone economy eclipsed this figure, shrinking at its fastest rate on record, with a Q1 GDP number of -3.8%. Q2’s number should also be severely impacted.
China’s manufacturing purchasing managers’ indexes (PMIs) continued to show expansion – but only just – as they slipped to 50.8 from 52.0 a month earlier. Meanwhile, its new export orders plunged, indicating that restrictions to contain the outbreak in other countries are weighing on export orders and disrupting supply chains. ISM manufacturing PMIs from the US, UK and Japan showed contractions (i.e. came in below the 50 mark) at multi-year lows for April.
The Federal Reserve left rates unchanged on Wednesday 29 April and, as expected, did not propose any major initiatives, beyond expanding its US$600 billion main street lending programme. The European Central Bank also left rates unchanged, and announced plans to lend money to banks at rates as low as -1%. Both Powel and Lagarde referenced the large medium-term economic disruption due to the coronavirus and indicated that they are prepared to take additional action if necessary.
Up to last Thursday, the week saw the MSCI AC World up 3.5% in US dollar terms, and 1.5% in sterling terms, with the mood permeating to other asset classes. So credit, property securities and emerging market debt gained in value. On Friday 1 May, however, equity markets were down between 2% and 3%, wiping out the week’s gains.
Across April, the MSCI AC World rose 9.1% in sterling terms, despite the greatest ever deterioration in, and worse than predicted, economic numbers. Growth stocks continued to outpace their value counterparts. The difference between cyclicals and defensive sectors wasn’t as marked, with some defensives, such as communications services and healthcare outperforming, as did some cyclicals sectors, such as materials and energy, albeit off very low bases.
We continue to believe the economic background is going to be very tough for companies for quite some time, and see a number of risks even as the larger economies try to get moving again.
Exiting a lockdown is likely to be much harder than entering one, and particularly since there remains the risk of a second wave of infections. Future relations between China and the western world could spell a step back from globalisation, and corporate earnings will drop and potential bankruptcies will rise exponentially the longer the current situation drags on.
In fixed income, we see the benefit of the Federal Reserve’s supportive actions feeding through into some better performance in the corporate credit market, which is helping our portfolio performance, albeit at a slightly more limited level due to our bias towards shorter duration in the portfolios. Here, we anticipated government bond yields would rise in 2020 rather than fall to the low levels we are now seeing. To put it into perspective, right now the UK 10-year gilt is yielding just 0.24%, the German 10-year bund delivers a -0.6% yield, and the US is at 0.6%. The better yield on US bonds is the main reason we favour the US bond market.
Over April as a whole, property and alternatives were mixed, but in aggregate there were more positives than negatives. As with any investments that trade on exchanges, there has been some frightening volatility at times, and we hope that the worst is behind us in terms of knee-jerk reactions by investors to broader market events.
Performance was also impacted by our high cash positions, and our reluctance, which we believe is prudent, to commit that cash to buy assets at a time when there are so many uncertainties as to how the next few quarters (and beyond) may pan out.
We will see more moves towards de-containment in mainland Europe and the US this week, with the UK likely to shed more light on its lockdown exit strategy on Thursday 7 May. April’s US jobs report – called the non-farm payrolls – is due on Friday 8 May, and will confirm the initial jobless claims numbers and the speed and scale of the rise in unemployment.
There are a number of G20 PMIs due this week. China’s services and composite numbers are out on Thursday 7 May, which will give us a further indication as to how its economy is recovering.
In Europe, the release of the euro area’s March retail sales, along with March data from Germany on factory orders and industrial production, will help us understand more about the impact of the pandemic on the bloc’s economy and political solidarity.
The Bank of England meets on Thursday 7 May and, while nothing major is expected, sees the release of its quarterly monetary policy report with the latest forecasts for UK growth and inflation.
Finally, earnings season continues over the coming week, with 159 S&P 500 companies reporting.
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Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
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