Capital Markets Update
- In a nutshell
- Past the peak
- Stimulus ramps up
- Oil goes negative
In a nutshell
Risk assets rallied sharply in April, as the news-flow on COVID-19 improved, with global COVID-19 infection and death rates stabilising. In addition, sentiment was buoyed by further global fiscal and monetary stimulus, and more of a focus on exit strategies for economies around the world. On a regional basis, (in GBP terms), all major regional equity indexes posted very strong returns. US equities delivered the greatest returns, driven by its relatively large allocation to technology stocks that outperformed. UK equities again lagged most global equity benchmarks, owing to the continued underperformance of cyclical sectors like energy and financials. Whilst equity markets were humming, the bond market told a different story in April. Yields remained depressed, a product of central bank activity and the expectation of continued economic malaise.
Past the peak
Many countries around the world saw infection and death rates decline in April, providing evidence that strict lockdown measures have been successful in ‘flattening the curve’. More attention is now being given to how economies can re-open. In addition, there was some encouraging news from the trials of anti-viral drugs (e.g. Remdesivir), which could improve recovery times from COVID-19. However, a lot of uncertainty remains, particularly how governments can navigate the tightrope that is re-opening economies whilst avoiding a second wave of infections. And whilst the progress on anti-viral drugs is welcome, it is by no-means a silver bullet. A vaccine remains the ideal solution, however this still looks a distant prospect. Until then, policy makers will have to continue to tread with caution.
Stimulus ramps up
Policymakers remain committed to the task of minimizing the permanent economic damage to the global economy. The Federal Reserve announced in April that they would extend their bond purchases to the lower-rated high yield space, a move previously thought unthinkable by economic commentators. This has helped to ease stress in credit markets and improve liquidity. The European Central Bank continued its quantitative easing programme, with a focus on helping those countries worst affected by the virus. In addition, it eased collateral requirements for banks in order to boost lending for small and medium sized businesses. And finally, in China, interest rates were cut, and social financing loans accelerated to try to reduce liquidity risks.
Oil goes negative
Oil remains a standout asset class during this crisis due to its volatility. West Texas Intermediate (WTI) oil futures for immediate delivery briefly went negative in April, meaning people were actually paid to take physical delivery of oil! This was caused by a shortage of storage facilities, coupled with concerns over future demand. The Organisation for Petroleum Exporting Countries (OPEC) and other major oil producing countries met (virtually!) in April to tackle the price collapse of black gold. An agreement was reached to end the price war and cut future production. However, the demand side picture remains bleak and so the jury is out whether this will be sufficient to drive a sustainable recovery in oil prices.
Multi manager team views
We are encouraged by the continued monetary and fiscal support from policymakers and believe this has raised the floor for equity prices. However, the size of the rally in April suggests that markets are starting to price in quite an optimistic recovery scenario. Given the current uncertainty over both the future direction of the virus (risk of a second wave) and the economic fallout, we believe an element of caution is therefore still warranted on markets at this juncture. Periods of market stress like this highlight the importance of maintaining a diversified investment portfolio, which is at the core of the Octopus proposition.
The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.