April 2020: investment market commentary

As the pandemic spread and global case numbers continued to rise, some investors chose to look through what they hope will be a short (but deep) economic contraction towards a potential recovery in the second half of the year. While the extraordinary monetary and fiscal policy responses from central banks and governments have played an influential role in calming markets, optimists were also buoyed by growing talk of lock-down exits, slowing growth in COVID-19 cases, and potentially more effective treatments, such as Gilead Science’s Remdevisir.

This crisis is unprecedented in the modern era, and a great deal of uncertainty remains. Although the level of volatility reduced a little from the extremes seen in March, it has remained elevated. Many corporates have responded to the uncertainty by reducing costs and shoring up balance sheets, which has resulted in a sharp rise in unemployment and a high level of bond issuance. Another response has been the wide-scale suspension of dividends and the withdrawal of management guidance on business prospects.

Globalisation was already in retreat before this crisis, and problems with complex and distant supply lines will have a lasting impact on how companies plan for the future. Where all this leaves the future relationship between the Western World and China remains to be seen, although trust and goodwill appear to be in very short supply nowadays. Certainly this crisis has the potential to be a major set-back for US-China trade relations once negotiators return to the table. With the US election scheduled for the fourth quarter, and Trump’s position apparently weakened by his poor handling of the pandemic, investors will need to wary of his tweets. Equally, Brexit seems to have become almost a forgotten word, and while the UK government insists it is pressing on regardless, most observers believe an extension to the end December transition deadline is now inevitable.

April will also be remembered as the month when, for a short period of time at least, one measure of the oil price turned negative. With the collapse in global demand overpowering OPEC+ dramatic production cuts, oil storage facilities were fast filling up, and as the May contract for West Texas Intermediate Oil (WTI) came close to expiry, investors rushed to offload their commitment to take physical delivery at WTI’s hub in Cushing, Oklahoma. The crisis reached its peak with some poor souls having to pay over US$40 per barrel to extricate themselves from the contract.

Despite the volatility, global equities managed a spirited recovery, particularly in the early part in the month. In sterling terms, the MSCI AC World Index rose +9.1%. The US led the way with a +11.5% gain, followed by the emerging markets (+7.6%) and Asia ex Japan (+7.4%). Elsewhere, Europe ex UK (+4.6%), the UK (+3.6%) and Japan (+3.8%) also made gains, but were less buoyant. Sectors leadership was mixed, with cyclicals performing broadly in line with stable earners. Energy (+14.1%), consumer discretionary (+13.8%) and materials (+12.3%) performed well, alongside IT (+11.6%), communication services (+10.0%) and healthcare (+10.0%). In terms of style, growth (+10.8%) once again outpaced value (+7.2%), while smaller companies (+11.9%) did slightly better than larger companies (+9.1%).

Fixed income was generally helped by central bank quantitative easing, which pushed yields lower across most sub-sectors. Even though the JP Morgan Global Government Bond Index rose by +0.6%, it couldn’t keep pace with the recovery of  riskier corporate and emerging market bonds, which also benefitted from a general tightening of credit spreads. Over the month the ICE Merrill Lynch Global Corporate Investment Grade Bond Index rose +4.5%, the ICE Merrill Lynch Global High Yield Bond Index gained 4.4%, and the JP Morgan Global Emerging Market Bond Index delivered +2.0% (all hedged to sterling).

The Bloomberg Commodities Index fell -3.0%, although this masked considerable sector dispersion. Safe haven gold (+4.6%) and industrial metals (+0.8%) were the best performers, while crude oil (-25.1%) and agriculture (-7.0%) declined.

Under the circumstances, currency markets were relatively quiet, with the pound rising against the US dollar, yen and euro by +1.5%, +1.1% and +2.2% respectively. Elsewhere, worries about severe economic contraction saw the currencies of a number of the weaker emerging market economies continuing to lose ground against the pound, including the South African rand (-5.3%), the Mexican peso (-3.7%) and the Brazilian real (-6.9%).

Note: All monthly data is quoted in sterling terms unless otherwise stated.