MARKET COMMENTARY – MARCH 2020

During February concerns regarding the outbreak of the novel coronavirus (COVID-19) continued to dominate headlines, replacing ongoing trade issues and geopolitical tensions as the main focal point for markets.  The beginning of the month saw markets largely brush aside concerns regarding the outbreak, with many taking the view that the negative effects of the virus would be temporary and largely confined to China and the surrounding economies.  The increases in cases outside China, including northern Italy and South Korea however led to a sell-off towards the end of the month which has accelerated as the month has gone on.

A decision to reduce interest rates in the US by 0.50% in order to provide further monetary policy support to counteract the potentially significant impact of the virus on global economic growth was met with an element of angst as markets digested how effective this may be.  In response, the US 10-year treasury yield fell to an all-time low of 1.1%, reflecting investors risk aversion. A number of other central banks including Australia, Malaysia and China also cut interest rates in response.  Fiscal stimulus is now expected and the Chancellor of the Exchequer announced measures in the Budget intended to provide support.

In the US, macro-economic data continues to be mixed.  January’s employment report illustrated a better than expected rise in employment, while attractive mortgage rates continue to support activity within the housing market.  Conversely, industrial production fell for the second consecutive month and indicators of economic sentiment have shown signs that the coronavirus outbreak is beginning to impact confidence.  The latest macroeconomic data would suggest that the US economy remains broadly healthy, although data is expected to deteriorate significantly when the impact of coronavirus on demand starts to show up fully.  This potentially sets the scene for further monetary stimuli, with the markets pricing in a further three interest rate cuts by the end of 2020.  On the political front, the moderate Joe Biden leads the race for the Democratic nomination following strong results in the latest primary elections.

Economic data does however show an impact from coronavirus already, including a decline in export orders and longer delivery times as supply chains stall.  The global nature of the European economy does mean that there is vulnerability to supply chain shocks and in this context, should the situation worsen over the forthcoming months which looks likely stimulus measures are expected.

Consumer and business confidence improved in the UK, following on from the general election result of 13 December, with the labour market also remaining robust.  Brexit risk is however still a factor, particularly as the UK government and EU published their respective directives for post-Brexit trade negotiations, although the election result did provide some clarity which markets welcomed.  The Budget made it clear that the Johnson administration will not prioritise a balanced Budget in the short term, but rather take advantage of historically low government bond yields in order to finance an increase in public and infrastructure spending, coronavirus has served to reinforce this as monies are committed to supporting businesses and public services through this very challenging time.

The Chinese economy has seen a large shock due to the implications of the coronavirus outbreak, resulting in a number of preventative measures including significant restrictions on travel and production.  Production was subdued for the majority of February although picked up towards the end of the month as efforts to return to work and restart manufacturing began.  As a result, growth would be expected to slow significantly in the short term.  The People’s Bank of China (PBoC) have however provided supportive measures in the form of cutting the headline lending rate (Prime Loan Rate) by 10%, whilst provincial governments provided fiscal support through cuts to value added tax, social contributions and rent reductions.  A sharp recovery will depend upon the pace of the return to normal production and further clarity with regards to the extent to which the virus will spread.  Elsewhere, a number of emerging market economies, particularly net oil exporters, will be impacted by the weaker demand for oil, partially due to the disruption caused by the coronavirus but also due to the price war that has broken out between Russia and Saudi Arabia.

Uncertainties regarding coronavirus are expected to persist for some time although it would seem that the draconian measures adopted by China have brought the outbreak under control.  If risk aversion continues government bond yields are likely to continue to reduce, reflecting their perceived safe haven nature.  Other diversifying assets including gold and alternative assets such as infrastructure may continue to prove useful in mitigating equity market risk to an extent.  Evidence of the virus outbreak being brought under control will be key to changing investor sentiment and triggering the start of recovery.

Performance to 5 March 2020

 *February 2020