MARKETS – GENERAL
Some assets may have enjoyed a decent rally from the March lows, but it still feels as if we are far from out of the woods. Such rallies are common in periods of heightened volatility and within established bear markets. From a historical perspective, we would expect renewed pressure on risk assets. This said, of what use is history here given how unique a situation we find ourselves in? A rapid unlocking of the global economy brings obvious risks to health systems, but if the authorities reach the point where they make such a move (having decided economically speaking that the ‘cure’ is worse than the ‘disease’) then markets could recover quickly. This would seem to be overly ‘optimistic’ though and unlikely at the present time. The equity markets seem to be somewhat disconnected from the potential magnitude of the global economic downturn flagged by bodies such as the IMF and many equities still look far from cheap. Corporate earnings expectations (especially in the US) still seem to be on the high side, and as companies report and economic data filters through, we could see further falls. Sentiment is still fragile and for us the idea that we are ‘done’ with this crisis (from a financial markets perspective) is unlikely. In truth, portfolio positioning at this point is exceptionally difficult as forward-looking markets could quickly rally further or could sink on bad news related to the virus. More likely, a very slow return towards ‘normal’ from lockdown is going to result in a shallow rather than ‘V-shaped’ economic recovery.
Meanwhile, sentiment has been hit further by the extraordinary developments in the oil market with prices continuing to collapse and contracts for May delivery of West Texas Intermediate (WTI) actually going negative earlier this week! Clearly the political stand-off between oil producers is contributing to massive oversupply, but the developments also point to the collapse in global economic activity and demand we are facing. It is difficult to comprehend how great the falls in risk assets might have been had it not been for the interventions of central banks and governments. Would equity markets have continued their downward spiral and been, perhaps half of their current levels? It’s perfectly possible. The response is therefore something for which we should be grateful, but long term, are we not going to end up with even more indebtedness and markets further distorted by what is essentially central planning? Indeed, after what most expect to be a significant fall in inflation, might we also see a significant bounce in 2021 and beyond? Inflation, for most of the developed world, has not been the issue it used to be for more than a decade. Might that change?
It is very difficult to determine just what is priced into markets at the moment. Lockdowns being lifted over the summer? An ultimate vaccine solution being found but only next year and only after more waves of infection? A rapid recovery in GDP to previous trend levels or something more drawn out? We are not rushing into major changes at this point – we have already been running diversified portfolios containing sensible protections. It does feel as if our long-standing caution seems more than justified at the current time. If we feel the need to make further changes to either add or remove risk as the situation unfolds, then we will act accordingly.
Investment Line is written and edited by members of the Mattioli Woods Group investment committee and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.
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