Snapshot

Strategy & economics

Coronavirus and markets – our latest views


Investment Team

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Recent stock market falls have exceeded those experienced in the past decade, including the eurozone debt crisis of 2011 and the Chinese growth scare of 2015-2016. The week ending Friday 13 March ranked as one of the worst for global equity markets in over a decade.

Our portfolio positioning as we entered this period has offered broad protection against equity market turbulence (scroll down for more detail).

It is important to remember that fear and efforts to prevent the spread of the virus are a greater economic risk than the virus itself

We are closely monitoring a broad range of indicators in relation to markets, the spread of the virus and countries' various efforts at containment, as well as the responses of central banks and other authorities to support economies and financial systems.

Market anxiety finds a new focus

Investors now fear a downturn in global consumption, potentially similar to downturns relating to the financial crisis in 2009 and the terrorist attacks in 2001.

It is possible that disruptive efforts to contain the virus could lead to a technical recession in the near term – defined as two consecutive quarters of negative growth. However, this would not be a traditional recession caused by economic fundamentals. 

The key question is whether the recovery from a such a downturn will be rapid and "V-shaped", as in the two cases above, or take longer to materialise.

Reassuring action from central banks and governments

It is clear that central banks and governments around the world are trying to implement the lessons learned in 2008-09. Many have now announced measures to protect market liquidity and ensure the flow of credit. 

It is important to remember that fear and efforts to prevent the spread of the virus are a greater economic risk than the virus itself. Conditions could recover quickly once it is clear the spread of the virus is under control. 

Coronavirus: predicted pattern of infections

projections_eurozone_infection_levels

Source: JPMorgan

What we are doing now

Heading into this year our portfolios had holdings in gold and other alternative assets. These positions reflected our concern that segments of equity markets were highly valued.

This stance has served well in recent weeks and acted as a shield from the worst of the stock markets' falls, despite our underweight position in fixed interest.

History has shown that trying to "time" market lows is a difficult exercise, and so we are taking an approach of incrementally adding to risk assets such as equities. Triggers that could lead us to increase our equity exposure could include:

  • clear signs that the infection rate is peaking and/or decreasing
  • the identification of a vaccine that can be mass produced
  • a coordinated, credible strategy to prevent the spread of the virus
  • further policy stimulus
  • further market weakness from current level

Market turmoil: recent developments

Equity markets remain under heavy pressure. 

In response to the unfolding crisis, the UK's Chancellor of the Exchequer announced £330 billion of government loan guarantees on March 17. He also announced further support measures for businesses in retail and leisure, including cash grants of up to £25,000.   

The Federal Reserve again cut US interest rates on 15 March. Its target rate is now 0.0%-0.25%. The US central bank also announced $700 billion of asset purchases, known as "quantitative easing" (QE), and a range of other supportive measures.

Last week, the European Central Bank increased the size of its QE programme in addition to measures to support lending.

Azad Zangana, European Economist, Schroders, said: "Ultimately, the ECB’s power is very limited. Co-ordinated fiscal policy must now take the lead in order for the appropriate policy tools to be introduced to support struggling households and businesses. "

The ECB's announcement came a day after the Bank of England surprised markets with its Budget-day rate cut. In turn, the UK's Budget set out a range of measures designed to help businesses, services and individuals cope with the pandemic.

In the short term, some of these measures could heighten volatility, although over time we would expect them to help markets and economies. Different economies and markets may experiment with different measures before the right policy mix is found.

Steep falls for the FTSE100 and S&P 500 in recent weeks

Twin impact of oil price shock and coronavirus uncertainty

The spread of the virus was already casting uncertainty over the outlook for economic growth and corporate earnings. The oil price fall is causing investors to reassess the prospects of companies and economies heavily exposed to oil production.

A key area of stress is in credit markets, with investors increasingly concerned about the ability of businesses to meet their obligations and refinance themselves. This has led to a very sharp widening in credit spreads (the additional price that businesses pay for borrowing, over and above the price governments pay). This is especially the case for lower-grade credits. It also has a knock-on effect for the banking sector, where there is increased concern over defaults.

Oil price shock – 9 March

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 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. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Contact Cazenove Capital

To discuss your DFM requirements, or to find out more about our services and how we can help you, please contact:

Nick Georgiadis

Nick Georgiadis

Head of DFM Team nick.georgiadis@cazenovecapital.com
Simon Cooper

Simon Cooper

Business Development Director simon.cooper@cazenovecapital.com