Market update – May 2020

Investors becoming more optimistic

Global stock markets are shrugging off the worst economic data in decades. US GDP fell by close to 5% in the first quarter, with significantly worse figures expected in the second. Weekly US jobless claims indicate that the crisis has resulted in some 26 million job losses, with the US unemployment rate estimated to be close to 14%. Yet global equities, as measured by the MSCI World Index, have rallied by almost 30% since late March. This suggests that investors are increasingly confident in a “V or U-shaped” recovery. They have been encouraged by major economies, including the US and Germany, setting out plans to restart their economies. Positive data on a potential coronavirus treatment has further helped sentiment.                                               

Central banks and governments have been key to stabilizing expectations

Government support packages are now providing support to millions of workers and small businesses around the world. Though these programmes will replace only a portion of the output lost in the first half of the year, investors hope that they will allow economies to emerge relatively intact when lockdowns are lifted. Meanwhile, central banks have played a key role in stabilizing financial markets and dampening volatility. One particular area of investor concern has been credit markets, with the pandemic response putting the cash flow and balance sheets of even large companies under strain. Both the Federal Reserve and the European Central Bank have eased this worry by including corporate bonds that have recently lost their investment grade ratings – known as “fallen angels” – in their asset purchase programmes.

Crisis accelerates long-standing market trends

The US tech giants are emerging as clear winners from the coronavirus crisis, as consumers and businesses in lockdown make even greater use of their services. At a time when many companies are being forced to cut dividends and raise new equity, shares in Amazon and Microsoft are hitting all-time highs.  

By contrast, sectors and economies that were struggling before the crisis have seen their position weaken further. There are now clear signs that investors are once again worried about prospects for the eurozone, and in particular Italy. The country’s debt and slow growth have always made it likely that questions of debt sustainability would re-emerge at some point. With the Italian government forced to sharply increase spending in response to the pandemic, this could happen sooner rather than later. 

Portfolio positioning

We have benefited from adding modestly to equity positions last month. However, higher levels of volatility could return as investors re-assess the likelihood of a quick economic rebound. This year’s market volatility has shown the value of our diversified approach to asset allocation. We maintain a material position in alternative assets, including gold, where appropriate. This has helped to protect portfolios in recent months and we believe it continues to have valuable defensive properties.

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