A selection of articles looking back through the markets last month.
Global Market Review
Following March’s collapse in share prices, global stock markets made a partial recovery in April, although most major indices still sustained double-digit losses compared with the start of the year. As the coronavirus pandemic continued to cut a swathe across the world, the World Health Organisation (WHO) reported that 3,090,445 cases of COVID-19 had been confirmed by the end of April, with 217,769 deaths recorded. During April, the FTSE 100 Index rose by 4%, while the Dow Jones Index climbed by 11.1% and Japan’s benchmark Nikkei 225 Index rose by 6.7%. In Europe, the Dax Index increased by 9.3% and the CAC 40 Index rose by 4%.
“Unavoidable declines in trade and output will have painful consequences” (WTO)
A sharp slowdown in global economic activity drove down the price of oil to its lowest level for more than 20 years, and Brent Crude oil dropped below US$20 per barrel. The World Trade Organisation (WTO) expects global international trade to contract sharply this year, and the decline could range from a “relatively optimistic” 13% to as much as 32%. The WTO predicted that “unavoidable declines in trade and output will have painful consequences for households and businesses, on top of the human suffering caused by the disease itself”. Meanwhile, Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva warned that the pandemic could result in the “worst economic fallout since the Great Depression”. The IMF expects the global economy to shrink by 3% this year, before posting a “partial” recovery next year with growth of 5.8%, but reiterated that the outlook remains highly uncertain.
Data released in April provided tangible evidence of the initial economic impact of the coronavirus pandemic. In China, where the first instance of the virus was reported at the end of 2019, the country’s economy shrank by 6.8% year on year during the first quarter of 2020, compared with growth of 6.4% in the same period last year. The US economy contracted at an annualised rate of 4.8% during the first quarter of 2020, having grown by 2.1% in the final quarter of 2019. Elsewhere, the eurozone’s economy shrank at an annualised rate of 3.8% during the first quarter, registering a more severe quarterly decline than during the financial crisis. Meanwhile, in the UK, IHS Markit warned that economic growth in the second quarter is likely to contract “to a degree previously thought unimaginable”.
Asia & Japan Market Review
“A crisis like no other”
Asia is facing “a crisis like no other”, according to the International Monetary Fund (IMF), which warned that the coronavirus pandemic’s impact on the region will be “severe and unprecedented” and will outstrip that of the Global Financial Crisis. Economic growth in Asia is set to stall this year, representing its worst growth performance for almost 60 years. The IMF expects that the outlook for Asia is likely to depend on two key factors: the extent of the global economic slowdown, and of China in particular. Nevertheless, looking ahead to 2021, prospects remain “highly uncertain”, but the IMF believes that the region’s economy will rebound strongly.
“Economic growth in Asia is set to stall this year”
In Japan, concerns about the global economic impact of the coronavirus pandemic pushed sentiment amongst larger manufacturing firms into negative territory, according to the Bank of Japan’s (BoJ)’s Tankan survey of business sentiment. The BoJ slashed its forecast for economic growth in Japan in 2020 from a range of 0.8% to 1.1% to a range of -3% to -5%, and confirmed that inflation is likely to remain well below its 2% target until at least 2022.
Retail sales dropped at an annualised rate of 4.6% during March as shops closed and consumers stopped spending. Consumer confidence plummeted and the government warned that Japan’s economy was “getting worse rapidly in an extremely severe situation”. Meanwhile, industrial production declined steeply during March, dropping by 3.7% month on month; inventories rose sharply and shipments fell by 5%. The Nikkei 225 Index rose by 6.7% during April, and the Topix Index climbed by 4.3%, while the TSE Second Section Index posted a monthly increase of 8.1%.
South Korea’s economy contracted by 1.4% quarter on quarter during the first three months of 2020, having expanded by 1.3% over the final quarter of 2019. Private consumption fell by 6.4%. Exports plummeted in April, registering an annualised drop of 24.3% during the month, and imports declined by 15.9%. The Kospi Index rose by 11% in April.
Australia faces its worst contraction in national output since the 1930s, according to the Reserve Bank of Australia (RBA), which expects output to fall by 10% during the first half of 2020. Nevertheless, RBA Governor Philip Lowe believes the economy could stage a strong recovery if lockdown measures are eased in a timely manner. The ASX All Ordinaries Index rose by 9.5% in April.
Emerging Markets Review
All eyes on China
Demonstrating the economic impact of the coronavirus pandemic, China’s economy contracted at an annualised rate of 6.8% during the first quarter of 2020, compared with growth of 6.4% in the same period last year. Having contracted in the first quarter, investors are likely to watch China’s progress closely during the second quarter. While the International Monetary Fund (IMF) has predicted that emerging markets and developing economies will contract by 1% this year, rebounding to grow by 6.6% next year, it expects China to achieve growth of 1.2% in 2020 and 9.2% in 2021.
“The World Bank expects Brazil’s economy to contract by 5% in 2020”
China’s exports fell at an annualised rate of 6.6% during March, while imports fell by 0.9%. In comparison, exports decreased by 17.2% year on year over January and February combined and imports declined by 4%. Industrial production dropped at an annualised rate of 1.1% in March, compared with a decline of 13.5% over the first two months of the year. Meanwhile, retail sales fell by 15.8% year on year over March, having fallen by 20.5% during January and February.
After stabilising in March, China’s manufacturing activity relapsed during April as export orders posted a sharp drop, falling at their steepest pace since December 2008. According to the Caixin/Markit purchasing managers’ index (PMI), business confidence also declined, falling to a four-month low. The Shanghai Composite Index rose by 4% during April, but fell by 6.2% over the year to date.
Brazil has more cases of coronavirus than any other country in the Americas, apart from the US, according to the World Health Organisation (WHO), which confirmed 71,886 cases in Brazil by the end of April, with 5,017 deaths recorded. The World Bank expects Brazil’s economy to contract by 5% in 2020; the country faces three major shocks: weak global demand, low oil prices – Brazil is a net exporter of oil – and the economic disruption from domestic virus-containment. Although Brazil’s government and central bank have stepped up measures to address the impact of the virus, the World Bank warned that risks to the downside are “significant”.
Amid mounting expectations of a cut in the key Selic interest rate when central bank policymakers meet in May, Brazil’s currency continued to weaken over April. The Bovespa Index rose by 10.3% during the month but has fallen by 30.4% since the start of the year.
Europe Market Review
European economies shrink in Q1
European equity markets generally rebounded in April after sustaining steep falls in March. Although lockdowns began to ease in some countries, investors remained deeply concerned about the economic outlook for the region. Initial data releases did little to allay their fears, and the eurozone’s Economic Sentiment Indicator deteriorated sharply during April, falling close to lows last seen during the Great Recession.
“The ECB believes that growth could contract in 2020 by between 5% and 12%”
In Germany, business confidence fell to its lowest level on record as the Ifo Institute’s Business Climate Index dropped from 85.9 in March to 74.3 in April. Ifo warned: “Sentiment at German companies is catastrophic … Companies have never been so pessimistic … The coronavirus crisis is striking the German economy with full fury”. Ifo estimates that Germany’s economy shrank by 1.9% during the first three months of 2020 and expects to see a contraction of 12.2% during the second quarter and of 6.6% over 2020 as a whole. Germany’s Dax Index rose by 9.3% during April, but remained 18% below the level at which it began the year.
The eurozone’s economy posted a quarterly decline of 3.8% during the first three months of the year, representing a worst quarterly performance than during the financial crisis. France slipped into recession: following a contraction of 0.1% in the final quarter of 2019, its economy shrank by 5.8% during the first quarter of 2020, registering its biggest drop since 1949. The CAC 40 Index rose by 4% during April, bit fell by 23.5% over the year to date.
Elsewhere, Spain’s economy contracted by 5.2% and Italy’s economy shrank by 4.7%. Credit ratings agency Fitch downgraded Italy’s credit rating to “BBB-“ – one step above speculative grade – and cautioned: “downward pressure on the rating could resume if the government does not implement a credible economic growth and fiscal strategy”.
President of the European Central Bank (ECB) Christine Lagarde commented: “The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime”. She warned that the region’s economic contraction is likely to be “even more severe” in the second quarter; the ECB believes that growth could contract in 2020 by between 5% and 12%, although the extent of the decline will depend on the duration of lockdown measures and the success of policies to support businesses and the workforce.
Global Bond Market Review
A bleak outlook
Although equity markets recovered to some extent during April, investors’ appetite for risk remained weak. Bond yields picked up towards the beginning of the month amid cautious optimism over the reopening of the US economy. However, any nascent positivity was swiftly restrained by fresh fears over the economic outlook that were compounded by plummeting oil prices.
“Any nascent positivity was swiftly restrained by fresh fears over the economic outlook”
The International Monetary Fund (IMF) predicts that the global economy will contract by 3% this year, after which it will stage a “partial” recovery in 2021 with expansion of 5.8%. During the first quarter of 2020, the US economy contracted at an annualised rate of 4.8%, and China’s economy shrank by 6.8%. Meanwhile, the eurozone’s economy shrank by 3.3% year on year and France slipped into recession.
Investors’ appetite for US Treasury bonds was fuelled during the month by disappointing economic data. The ten-year US Treasury bond yield fell from 0.66% to 0.62% over April, having begun the year at 1.92%. Elsewhere, the yield on the 30-year Treasury bond declined from 1.32% to 1.27%, after starting 2020 at 2.3%. Demand for US Treasury inflation-protected securities (TIPS) was strong in April, and the yield on the ten-year TIPS fell to -0.56% during the month.
A “deep” global recession is expected this year, according to Fitch Ratings, which believes that the fall in global GDP in 2020 will be similar to the global financial crisis, but the impact on activity and jobs will be more severe. In particular, the impact of the pandemic, alongside the drop in commodity prices, has created the most adverse economic conditions for emerging market sovereigns in modern times. Fitch believes that the sovereign issuers who are most at risk are those that rely on commodity exports, tourism or remittances, those that have precarious financing, and those with weak credit fundamentals. Fitch has implemented 18 emerging market sovereign downgrades already in 2020, representing the largest-ever annual total in less than four months.
Concerns over the economic impact of the coronavirus has pushed up US corporate credit stress to recession levels, according to S&P Global Ratings, as downgrades rose to make up 90% of total ratings actions. Although most of these downgrades were issuers rated “B+” and below, they also included “fallen angels” such as Kraft Heinz, Ford Motor, and Delta Air Lines.
UK Bond Market Review
The economic outlook deteriorates
Although sentiment showed signs of improvement in April after March’s plunging stock markets, investors remained nervous. A survey conducted by GfK found that consumer confidence slumped to its lowest level since 2008 during the second half of March. Over April as a whole, the yield on the benchmark UK gilt fell from 0.35% to 0.25%.
“The shutdown has caused economic activity in the UK to collapse”
The shutdown has caused economic activity in the UK to collapse, according to IHS Markit, which reported: “Record falls in output across both manufacturing and services are being accompanied by job losses on an unprecedented scale”. Looking ahead, IHS Markit warned that second-quarter GDP growth is likely to contract “to a degree previously thought unimaginable”.
The UK economy grew by only 0.1% quarter on quarter over the three months to February, and fell by 0.1% during the month of February itself. Although the labour market remained strong over the three months to February, March is likely to provide a changing picture as the lockdown began to take effect. The Office for Budget Responsibility (OBR) warned that the UK economy could contract by as much as 35% during the second quarter as a result of the crisis, and the rate of unemployment could rise to 10%. Meanwhile, the Centre for Economics & Business Research (CEBR) estimates that the lockdown will cost the UK economy around £2.4 billion per day.
Following an agreement between the Bank of England (BoE) and the Treasury, the BoE’s “Ways and Means” facility – the Government’s pre-existing overdraft at the Bank – was temporarily extended during April to provide it with additional funds to finance measures to tackle the pandemic.
Credit ratings agency Fitch downgraded the UK’s credit rating from “AA” to “AA-” with a “negative” outlook. Fitch cited a “significant weakening” in UK public finances and short-term damage to the UK economy caused by the coronavirus crisis, alongside “lingering uncertainty” surrounding the post-Brexit relationship between the UK and the EU.
Demand for fixed income funds plummeted during March, according to the Investment Association (IA), and the sector experienced £7.4 billion-worth of net retail outflows. The worst-affected IA sector was £ Strategic Bond with outflows of £1.9 billion. Global Bonds and £ Corporate Bond also suffered outflows in excess of £1 billion each, while UK Gilts and UK High Yield achieve net retail outflows of over £1 billion between them.
UK Equity Market Review
UK plc on the back foot
Although UK share prices picked up slightly in April, the coronavirus continued to take a heavy social, corporate and economic toll. The World Health Organisation (WHO) reported that 165,225 cases had been confirmed in the UK by the end of April, with 26,097 deaths recorded, and the UK overtook Spain to become the third-worst affected country in the world behind Italy and the US.
“The fastest switch to a bear market in history” (IA CEO Chris Cummings)
The FTSE 100 Index rose by 4% during April, while the FTSE 250 Index climbed by 9%. Since the start of the year, the FTSE 100 Index has fallen by 21.8%, whereas the FTSE 250 Index has declined by 24.8%. By the end of the first quarter of 2020, 45% of UK companies had scrapped their dividend payouts, according to Link Asset Services’ Dividend Monitor.
Retail sales fell at an annualised rate of 4.3% during March, posting their worst decline since 1995. According to the British Retail Consortium (BRC), an “unprecedented surge” in demand for food and essential items the first three weeks of the month was followed by a sharp drop in sales as the UK’s lockdown was imposed. Although demand for clothing fell swiftly, sales of computer equipment, board games and fitness equipment jumped. The BRC commented: “The crisis continues; the retail industry is at the epicentre and the tremors will be felt for a long while yet”.
Meanwhile, shop prices registered their steepest pace of decline since January 2017 during April. Prices fell at an annualised rate of 1.7% in April, compared with March’s reduction of 0.8%. As discretionary spending evaporated, decreases in non-food prices more than offset higher food prices. High street retailers Warehouse and Oasis entered administration, while department store Debenhams went into administration for the second time in a year.
Retail funds suffered record outflows of £10 billion during March, according to the Investment Association (IA). Investors’ risk appetite dropped steeply, and, having been the least-popular IA sector in February, UK All Companies proved one of the most popular sectors in March, second only to the Short Term Money Market sector by net retail inflows. In fact, only six IA sectors enjoyed net retail inflows, whereas 32 ended March in negative territory. IA Chief Executive Chris Cummings described the month as “the fastest switch to a bear market in history”.
UK Equity Income Market Review
Dividend cuts continue
Having experienced a difficult March, in which share prices plunged and dividends were cancelled, income-seeking investors experienced fresh pain in April as more companies opted to suspend their payouts.
“45% of UK companies had scrapped their dividend payouts by the end of the first quarter”
According to Link Asset Services’ Dividend Monitor, 45% of UK companies had scrapped their dividend payouts by the end of the first quarter and, looking ahead, Link confirmed that over £25 billion-worth of cuts will take place this year, with a further £23.9 billion-worth at risk. In comparison, £31.1 billion-worth of dividend payments are expected to remain safe.
While Link’s “best-case” scenario for 2020 sees dividends falling by 27% to £71.9 billion, its “worst-case” scenario shows dividends falling by 51% to £48 billion. A more realistic scenario predicts a drop of between 32% and 39%. The banking sector is experiencing the most pronounced impact, with cuts of around £14.6 billion, whereas the “classic” defensive dividend-paying sectors – for example, food retailing, food, drink & tobacco, and basic consumer goods – appear to be more likely to maintain their payouts. Link acknowledged the necessity for some companies to protect themselves, but warned that newsflow is “sure to get worse before it gets better”; nevertheless, looking further ahead, Link expects dividends to “bounce back next year even under quite bearish scenarios”.
Meanwhile, the Investment Association (IA) urged companies in the FTSE 350 Index that have decided to suspend dividend payments to reinstate them “as soon as it is prudent to do so”, citing the impact of dividend cancellations on savers, pensioners, pension funds and charities. Because so many companies have suspended or cancelled dividend payouts, the IA issued updated guidelines on the criteria for a funds’ eligibility for inclusion in its UK Equity Income or Global Equity Income sectors. The revised criteria – which will remain in place for twelve months – are designed to prevent short-term disruption to the equity income sectors.
During April, the yield on the FTSE 100 Index fell from 5.78% to 5.22% while the FTSE 250 Index’s yield dropped from 4.26% to 3.89%. In comparison, the yield on the benchmark UK gilt declined from 0.35% to 0.25%. The FTSE 100 Index rose by 4% during the month, and the FTSE 250 Index climbed by 9%. Insurers including Aviva and RSA and Direct Line decided to suspend planned dividend payouts following pressure from the Prudential Regulation Authority (PRA).
US Market Review
US economy shrinks
Despite the news that the US economy had contracted for the first time since 2014 during the first quarter, US equity markets ended April in positive territory in April as investors began to focus on the end of lockdown measures and the reopening of the economy. The World Health Organisation (WHO) reported over one million cases of COVID-19 in the US by the end of April – the largest number in any country to date – with 52,428 deaths recorded. During the month, President Trump set out plans to reopen the US economy. The Democratic Party endorsed Senator Joe Biden as its Presidential candidate ahead of November’s elections as Senator Bernie Sanders exited the race.
“The rate of unemployment increased sharply”
Technology stocks performed well during April: the Nasdaq Index rose by 15.4% over the month, narrowing its year-to-date loss to only 0.9%. In comparison, the Dow Jones Industrial Average Index rose by 11.1% in April but fell by 14.7% since the start of the year, while the S&P 500 Index posted a monthly increase of 12.7% and a year-to-date decline of 9.9%. The S&P 500 Index’s rise of 12.7% was the index’s best monthly performance since January 1987’s rise of 13.2%, according to S&P Dow Jones Indices.
The US economy shrank at an annualised rate of 4.8% during the first quarter of 2020, having expanded by 2.1% in the final quarter of 2019. This was the country’s first quarter of negative growth since the first three months of 2014, and there are fears that a second-quarter contraction could prove even deeper as the impact of lockdowns takes full effect on the economy.
Retail sales fell by 8.7% month on month during March, and consumer spending slumped. The savings rate surged from 8% to 13.1%, reflecting consumers’ unease. 701,000 jobs were lost in March, and the rate of unemployment increased sharply, rising from 3.5% in February to 4.4% in March.
Investors were heartened by the Federal Reserve’s (Fed’s) pledge to continue to provide support until officials are “confident that the economy has weathered recent events”. Nevertheless, Fed Chair Jerome Powell remained cautious: he believes the drop in second-quarter economic growth is likely to be “unprecedented”, and warned that the pandemic “will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook in the medium term”.