Latest investment news - 27 March

This week, the strongest market rally since the 1930s has followed the steepest, fastest slump in equities, leaving many to wonder where we are on the COVID-19 crisis.

It is important to realise however, that equities (and risk markets in general) will require two things to become durably positive:

1. Confidence that the spread of the virus has been halted and that there is a visible end to the strict containment measures in most countries
2. Confidence that the massive hit to the global economy will be short-lived.

Stopping the spread of COVID-19

Right now, each country is following a different policy for point 1 above. Italy has enforced a tight lockdown whilst suffering the worst death rate in the world (9% of reported cases). The path of the virus in Italy seems to be similar to Hubei province in China where the virus started. There is some hope therefore that the new infection numbers will start to decrease, bringing the spread under control and leading to the ultimate removal of the lockdown. If Italy can track China with a lag, markets may be able to see an end to their concerns on the health crisis. Other European countries seem to be one to two weeks behind Italy and taking similar steps.

The problem is that the US has taken a completely different route, despite having overtaken China in the total number of cases. There is an inevitable trade-off for each country between getting the virus under control and moderating the economic hit, but most European countries, like China, have opted for containment, whereas the US has been much slower in its lockdown efforts and may be willing to relax them before the virus is under control. This may at some point lead to renewed panic on the infection numbers, which the markets could take badly. We therefore don’t think the market impact of this crisis is totally behind us.

Bear markets (where share prices are continually falling) have a life of their own and the recent rally is part of the healing process. The last leg down may still be ahead of us, however, so we caution about being too bullish right now. 

Impact to the global economy

On point 2 above, the economic impact is currently the focus of all major central banks and governments. Central banks are full-on in their support of market liquidity, providing all-time low interest rates and all-time high quantitative easing (purchases of assets in the markets). Governments are stepping up fiscal stimulus at levels not seen since WWII (10% of GDP in the US, 22% in Germany, 16% in the UK, 14% in France, etc.). This means that when the lockdowns and quarantines are over, the world economy should be able to recover quite fast.

There will be some collateral damage, unfortunately. US unemployment has started to soar, whilst other parts of the world will be more reluctant to shed labour. Many services companies could be at risk, and bankruptcies will not be avoided. The stimulus packages agreed are in great part focused on limiting these harmful effects but can only do so much.

There is also a concern that some sectors will have difficulty servicing their debt and honouring their dividends, which may impact certain investors who rely on investment income for their livelihood. We appreciate this may affect a number of our clients and you can read a separate note on this from our Deputy Chief Investment Officer, Richard Champion here. If you are at all worried, please speak to your Investment Manager.

The bottom line is that we are further along to the end of this bear market, and the other side of the crisis could be very positive for risk assets, but we still need to be vigilant about the virus fallout and cannot sound the all-clear yet. We are nevertheless convinced that the massive economic damage will be mitigated by governments and central banks worldwide, and that it’s only progress on the virus itself that is holding markets back. When this crisis is over, we could well see another long-term bull market in equities and the opportunities will be rife.

You can also keep up to date with the steps we are taking on coronavirus, and our latest market updates here.

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.