March 2020: investment market commentary

As governments reacted to the spread of COVID-19 by bringing forward increasingly draconian social restrictions, it became quite apparent that the economic fall-out would be severe, at least in the short term. In financial markets, companies and individuals reacted to expectations that cash flow and income could be disrupted by drawing down on investments and reserves to help bridge finances during the downturn. This ‘dash for cash’ was compounded by enforced margin call pressures, which led to unusual trading patterns, with some listed assets changing hands at very low prices.

Almost daily, governments around the world announced increasingly restrictive measures designed to contain the spread of COVID-19 and alleviate pressure on health systems. With the benefit of experience gained in the 2008/9 financial crisis, policy makers reacted quickly, announcing massive monetary and fiscal stimulus packages. Any central banks with room to cut interest rates did so, with most promising significant (and in some cases, unlimited) quantitative easing (QE). Central banks will use QE to boost liquidity and lending, as well as to backstop critical markets such as the commercial paper (i.e. money markets), sovereign bond and corporate debt markets. QE will also be used to control (aka suppress) sovereign bond yields to minimise government borrowing costs. For their part, governments announced substantial fiscal packages offering a broad range of grants, loans, tax deferrals and guarantees aimed at supporting both businesses and individuals through the crisis.

As well as facing the fall-out from the COVID-19 pandemic, a second factor that added to market pressures was the collapse in the oil price, which resulted from the breakdown of the OPEC+ talks. Having fallen over 50% in a month, the oil price now trades in the low-to-mid US$20s per barrel, with reports that physical oil for immediate delivery is changing hands well below those levels. If this level of pricing is sustained, much of the North American oil industry (and various other higher cost producers) will suffer significant losses, and may soon be driven to bankruptcy. Faced with such a drastic change in circumstances, energy related equities and bonds (major sectors within both asset classes) fell sharply.

The outlook remains uncertain, with much depending on how long populations have to be confined, and economies supressed. Economists have put forward a veritable alphabet soup of letters to describe how they think the decline and recovery may shape up. No one knows for sure how this crisis will work out, but what is certain is that the longer the global economy is shackled by these measures, the deeper and more permanent the hangover will be.

Equity markets gyrated wildly through March, with many days seeing significant swings of plus or minus 5%. Over the month, the MSCI AC World Index finished down -11.0% in sterling terms. While all markets fell significantly, the weakest were the UK (-13.5%) and emerging markets (-12.9%). More resilient equity markets included Japan (-4.4%) and Asia ex-Japan (-9.5%).

Across sectors, there was a fair degree of discrimination, with defensive stable earners clearly outperforming economically sensitive cyclicals. As such, consumer staples (-2.6%), healthcare (-0.7%) and information technology (-7.0%) held up better than the likes of energy (-26.4%), financials (-19.9%), industrials (-15.3%) and real estate (-15.5%).

Finally, in terms of style, growth (-7.8%) proved more resilient than value (-14.4%), while larger companies (-11.0%) held up better than smaller companies (-18.7%).

A flight to quality helped advanced economy sovereign bonds post a small gain, while most other segments of the fixed income asset class were under significant pressure, including corporate bonds and emerging market debt. Over the month, the JP Morgan Global Government Bond Index gained +0.5%, while the ICE Merrill Lynch Global Corporate Investment Grade Bond Index fell -7.2%, the ICE Merrill Lynch Global High Yield Bond Index lost -13.1%, and the JP Morgan Global Emerging Market Bond Index declined -10.0% (all hedged to sterling).

The Bloomberg Commodities Index fell -10.3%, mainly driven lower by the collapse in crude oil (-53.1%). Although not as dramatic, industrial metals (-7.1%) also fell on concerns about weakening economies and reduced demand. One area that managed to buck the trend was gold (+4.7%), which benefited from its safe haven status.

Finally, risk aversion and the flight to safe havens was also apparent in the foreign exchange markets. Currency volatility was high throughout the month, and the pound slid against most of the major currencies, losing -3.2% versus the US dollar, -3.2% against the euro and -3.5% relative to the yen. However, the most notable moves came from some of emerging market currencies, which fell on worries about how their economies will cope with the economic challenges they face. Some of the more significant fallers versus the pound included the South African rand (-10.5%), Mexican peso (-17.1%) and Brazilian real (-12.8%).