Market Update - "Looking ahead beyond lockdown"


Market Overview 

Following the sharp falls in Q1 2020 as the full scale of the COVID crisis became apparent, markets regained their composure in Q2 2020. This followed a coordinated response from central bankers and policy makers around the world, on an unprecedented scale, dwarfing even the response during the financial crisis of 2008/2009. This response served to ‘float all boats’ as the MSCI All Countries World Index rose nearly 20% over the quarter in sterling terms, gilts rallied a further 2.5% and gold was up over 12%. 

The speed and strength of the recovery in asset prices over the quarter should however give investors pause for thought, and conceal an elevated level of volatility which we expect to continue against such pronounced uncertainty.


Technology companies dominated the top performers as huge swathes of the global economy adapted to remote working overnight.


The market will inevitably experience bouts of nervousness in the short to medium term, likely to be caused by any number of catalysts, the most obvious being a second wave of COVID cases and subsequent return to lockdown, a resumption in the trade war between the US and China, or hawkish comments from central bankers about inflation. However, at present our expectation is that any significant setback will be taken as an opportunity to deploy cash and reduce more cautious uncorrelated alternatives to take advantage when the right opportunity presents itself.


Government debt is certainly set to continue to increase but the relatively low interest rates, along with the massive fall in energy prices we have experienced, are all positive for recovery. Although debt is higher, lower interest rates do mean that the servicing cost of this, is being restrained. 

Normality?

We are steadily starting to return to some signs of normality with a nervous exiting of lockdown but markets do continue to be unsettled.

It remains that the hidden costs of lockdown on all of us as well as the economy will not truly be known for some time yet and Governments continue to find themselves in a difficult position whilst they try to balance public health against the financial well-being of the country.  


Preserving cash

One very important factor for companies has been conserving cash and ensuring they have sufficient liquidity and banking facilities to get through this crisis. There are various ways companies conserve cash, including delaying capital expenditure and to reduce, cancel or postpone dividends. Dividend futures are currently predicting that dividends on the FTSE 100 will reduce by as much as 60% this year. Even companies like Shell, which had not cut its dividend since WW2, have been forced to do this. 

Usually cutting a dividend is a last resort and reflects financial distress; in this crisis many companies altering their dividends are doing so not because they cannot pay but as a prudent measure to preserve cash until the outlook solidifies. 


Fixed Income

Fixed income markets have also been affected but have calmed and corporate investment grade debt remains, we believe, reasonably priced. Government bond yields, despite massive higher government debt, have fallen to truly historic levels. 

We expect continued central bank support, including QE, will keep a lid on yields but that they remain an unattractive place to invest for any reason other than simple safety. Encouragingly, debt markets have remained open for companies to raise finance through bond issuance.


Safety on the roads?

Lockdown has been little short of disastrous for car producers. Sales in Western Europe alone fell by almost 80% in April. However, better news might not be too far down the road. 

In China, now driving the charge towards economic unlocking, individual car use has been jump-started, as people try to avoid public transport. So much so, that congestion in some cities has returned to 90% of former levels. The car industry is however thankfully wanting to 'build back better', and in order to preserve our newly found clean air, is looking to give electric cars a further push.