Market Update – H1 2020
It is difficult to make predictions for the second half of this year, other than to say that we do not expect it to be as volatile! The first half can best be described as a rollercoaster for investors.
After a quiet end to 2019, markets started to slide during February as the coronavirus pandemic took hold. The declines accelerated into March amid panic selling not just of equities and bonds, but oil, gold and other commodities as well. Governments worldwide (including the U.K.) reacted swiftly, cutting interest rates, ‘printing’ more money (QE), and providing fiscal stimulus in the form of wage subsidies and other transfers. Lockdowns, however, caused economic output to collapse in the second quarter – U.K. GDP in Q2 is forecast to have contracted by as much as 25%. This would be the worst recession in 300 years!
The saving grace, many were hoping for, was that it would be a ‘V’ shaped recovery. In other words, the upturn will be as swift and steep as the fall. Economic data has started to improve following record lows in April. Activity is resuming, albeit slowly, but we have only recovered to levels seen at the low point of The Great Financial Crisis in 2008/09, so the ‘V’ shaped recovery seems less and less likely.
Equities have rallied, but the U.K. market has lagged others in the recovery, which seems unfair because it was less expensive to start with. The FTSE 100 index has regained 50% of the loss experienced between the start of the year and the worst point in March. European markets have rallied over 60%, whilst the U.S. has recouped nearly 80% of its decline. The U.K.’s underperformance may be at least partially justified by its poor record of handling the covid-19 outbreak, and the slower re-opening of the economy required because of that.
Looking forward, we have base rates and gilt yields at record lows so borrowing remains cheap, and the savings rate has also been at historically high levels recently, so there is plenty of spending power waiting to be tapped into. Consumers just need something to spend the money on, but retail, travel and leisure outlets are only opening slowly with restrictions. This means that the equity market recovery is in danger of getting ahead of itself, particularly as the visibility of company earnings remains low.
In conclusion the easy gains have been made, more so in some sectors rather than others. Progress from here is possible but it is likely to be arduous and carry more risk. The value versus growth debate has re-surfaced following a rebound in value stocks during the rally. Some argue that we should see value outperform moving forward on the basis that earnings growth next year will be higher in the grouping than it will be for growth stocks. This is mainly due to the former experiencing much more severe falls in earnings this year, so even modest recoveries will look good in percentage terms. That said, sectors such as Banks look truly undervalued, particularly if dividends return next year.