Market update – April 2020

Pandemic to result in global contraction, followed by sharp rebound

As COVID-19 continues to spread, governments around the world have imposed unprecedented restrictions on their citizens, resulting in significantly reduced activity in the world’s biggest economies.

Equities, as measured by the MSCI World Index, have fallen approximately 25% from the year’s peak, as investors digest the implications for company earnings and balance sheets. Schroders’ economists currently expect a contraction in global GDP of just over 3% in 2020, the worst outcome since the 1930s. This forecast envisages a very steep contraction in the second quarter, followed by a strong rebound in the second half of the year as restrictions on activity are lifted. 

Investors will also experience lower income this year, as companies suspend distributions to preserve cash. During the 2008 financial crisis, dividend income fell by a total of 18% globally in US dollar terms. Income could decline by an even greater amount this year, and we are working closely with our clients to help them understand the implications for their budgets. 

Central banks helping to stabilise financial markets

Central banks are attempting to prevent the response to the health crisis from turning into a financial market crisis. Drawing on the lessons learned during the financial crisis of 2008, they have introduced a range of measures designed to protect market liquidity and the flow of credit.

In the US, the Federal Reserve has said it will conduct open-ended quantitative easing. It will also, for the first time ever, support credit markets through purchases of corporate bonds. In Europe, the European Central Bank has relaxed some of the restrictions on its government bond purchase programme, allowing it to provide more support to the region’s weaker economies.

Step-up in fiscal spending

Governments around the world have recognised that monetary policy alone will not be able to respond to the economic threat of the pandemic. Jobs are already being lost, with the US recording the highest ever weekly unemployment claims in late March. To cushion the blow, governments have announced a range of measures designed to support small businesses, employees and the self-employed. Speed will be critical to the success of these initiatives, as the benefits must reach their intended recipients before too many jobs and businesses are lost.

Portfolio positioning

Where appropriate, we have been incrementally adding to our equity positions at current levels. High volatility could persist over the coming months, but our base case remains that there will be a sharp economic rebound later in the year, which should support equity markets. Recent volatility has shown the value of our diversified approach to asset allocation. Heading into the recent sell-off, we had a material position in alternative assets, including gold. This has helped protect portfolios. We also retain our exposure to commercial property. While the sector faces short-term challenges and many funds have been suspended temporarily, we expect its income-generating characteristics will return to favour in an environment of very low interest rates.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

James Brennan

Portfolio Director