Market Review. 2020: Q1
Most commentators were in agreement; after a quiet first six weeks of the year, this was how it was going to be for markets for the rest of the year… How wrong could they be?!
The spread of the coronavirus started to take hold globally as we moved into March and markets went into panic mode. Equities sold-off rapidly, bonds crashed, and safe-haven assets were difficult to find. Even gold fell, as oil prices plummeted when the OPEC+ agreement disintegrated, and any chance of inflation any time soon, disappeared.
Equities had their worst quarter since Q4 1987 (the quarter of the ‘October crash’). FTSE 100 was down 25% over the first three months and an index of equities globally, the MSCI World, fell 21%.
Asian stocks outperformed as China, the first to really suffer, started to recover. There was indiscriminate selling with no recognition of stock-specific fundamentals, just a general liquidation.
Corporate bonds did not escape, and the lower the quality, the worse the fall. High yield bonds saw spreads (how much they yield compared to government bonds) widen to over 1000 basis points (10%+). The market was punishing the companies seen as most likely to fail and therefore least likely to repay their debts.
Economic data always lags, often by months, so over the next few months the news will continue to be bad. We are in recession, and in the U.K. national output could be down by as much as 30% to 40% in H1.
The Government has responded with massive stimulus/support. If we do see moves back towards normality in the second half, there will be a great deal of pent-up demand. This will provide a boost, but realistically a full recovery will take a few years (as it always does in a recession).
It is very difficult to believe that we have seen the low point for equities because the news is going to remain negative and the economy will take years to recover. We may, however, have seen the worst of the down-days and the volatility, so any losses may be more attritional over the coming months.
The only positive is that having seen falls of such magnitude, rolling five- and ten-year equity returns from this point, are probably a lot higher than they were expected to be, when the year started.