A selection of articles looking back through the markets last month.
Global Market Review
The extended bull run came to an abrupt end in March as the coronavirus continued to spread into Europe and America, and a collapse in confidence pushed share indices into bear-market territory. Investors suffered exceptionally high levels of volatility during the month as share prices plunged and the price of oil plummeted.
“Under any scenario, global growth in 2020 will drop below last year’s level” (IMF)
The FTSE 100 Index fell by 13.8% over the month and by 24.8% over the first quarter. In comparison, the Dow Jones Industrial Average Index dropped by 13.7% in March, and by 23.2% since the start of the year. Germany’s benchmark Dax Index posted a monthly decline of 16.4% and a quarterly decline of 25%, and Japan’s Nikkei 225 Index fell by 10.5% over March and by 20% over the first three months of the year.
The World Health Organisation (WHO) upgraded the coronavirus outbreak to “pandemic” status early in March. By the end of the month, over three-quarters of a million cases of Covid-19 had been diagnosed, with over 36,000 deaths recorded.
In a bid to stem the spread of the virus, governments imposed stringent lockdowns and quarantining measures. Companies were shut down, travel was restricted, and people were directed to stay at home. Business ground to a halt, fuelling concerns over the impact on economic growth. The International Monetary Fund (IMF) warned that “under any scenario, global growth in 2020 will drop below last year’s level”. Meanwhile, the Organisation for Economic Co-operation & Development (OECD) believes that the shutdowns will directly affect sectors equating to as much as one-third of GDP in major economies.
Governments around the world announced measures to support businesses and households against the impact of the pandemic. In particular, the UK Government announced a range of measures designed to support the UK economy, workers, and households, while the US Senate passed a coronavirus aid bill worth US$2 trillion. Elsewhere, major central banks loosened monetary policy, cutting interest rates and extending asset purchases to support the economy. The Bank of England (BoE) carried out two emergency interest-rate cuts, slashing its key interest rate to an all-time low of 0.1%. The US Federal Reserve (Fed) reducing its federal funds rate to a range of zero to 0.25%. Central banks including Canada, Malaysia, India, and Australia also implemented rate reductions.
Asia & Japan Market Review
Fears grow over Japan’s longer-term outlook
As the coronavirus intensified its grip, officials at the Bank of Japan (BoJ) increased monetary stimulus measures in an emergency meeting in a bid to soothe investors’ jitters. BoJ policymakers are worried that the economic crisis caused by the virus could push Japan’s economy into recession; the country’s economic growth was faltering even before the virus began to spread, undermined by a general global slowdown as well as an increase in consumption tax in October and growing fears over the likelihood of recession were compounded by the government’s decision to postpone this summer’s Olympic Games. Prime Minister Shinzo Abe pledged to make “every effort” to contain the virus, promising: “Afterwards, we will implement bold and strong economic and fiscal policies to return the Japanese economy to a stable growth path, aiming at a V-shaped recovery”.
“We will implement bold and strong economic and fiscal policies” (Japanese PM Shinzo Abe)
The Nikkei 225 Index fell by 10.5% during March and by 20% over the first three months of the year. In comparison, the Topix Index declined by 7.1% during March and by 18.5% during the first quarter, and the TSE Second Section Index fell by 13.7% over the month and by 28.1% over the first quarter.
The Reserve Bank of Australia (RBA) cut its key rate twice in less than three weeks to a fresh all-time low of 0.25%, and indicated that interest rates are likely to remain unchanged for some time. The RBA also introduced quantitative easing measures for the first time. RBA Governor Philip Lowe warned that the coronavirus represented “a major economic problem, which is having deep ramifications for financial systems around the world … Understandably, our communities and our financial markets are both having trouble dealing with a rapidly unfolding situation that they have not seen before”. Australia’s government announced measures to support jobs and businesses as they attempt to deal with the impact of the virus. The ASX All Ordinaries Index fell by 21.5% during March and by 24.9% over the first quarter.
South Korea’s central bank cut its key interest rate by 0.50 percentage points to 0.75% in a move designed to alleviate the impact of the coronavirus. Officials at the Bank of Korea (BoE) also implemented additional measures to ease borrowing conditions for companies. The Kospi Index fell by 11.7% during March and by 20.2% over the year to date.
Emerging Markets Review
China bucks the trend
Share prices in China generally fell less heavily in March than other major equity markets. While most share indices posted double-digit losses during the month – and since the start of the year – China’s benchmark Shanghai Composite Index fell by a comparatively muted 4.5% during March and by 9.8% during the first quarter. By the end of March, according to the World Health Organisation (WHO). 82,545 cases of Covid-19 had been diagnosed in China, with 3,314 deaths recorded. China’s central bank moved to support the economy by cutting its reserve requirement ratio from 1.5% to 1% for eligible banks, and injecting 550 billion yuan into the economy.
“Early indicators suggest that China’s economy may have rebounded in March”
Industrial production fell sharply during the first two months of the year, according to the National Bureau of Statistics (NBS), which reported an annualised drop of 13.5% in January and February, compared with growth of 6.9% in December. Meanwhile, industrial profits declined at an annualised rate of 38.3% during the same two-month period and retail sales dropped by 20.5% year on year. Nevertheless, early indicators suggest that China’s economy may have rebounded in March, albeit from a very low base.
Credit ratings agency Fitch warned that the coronavirus-related decline in commodity prices is likely to hit Latin America, with Brazil, Chile and Peru particularly exposed to lower demand from China for raw materials. Brazil’s main economic indicators remain weak, according to Fitch, which reported that many sectors are not yet on track.
Policymakers at Brazil’s central bank expect the coronavirus to impart three shocks to the economy: a supply shock, a production costs shock, and a shock to demand. The Copom cut its key Selic rate from 4.25% to 3.75%, but officials remain reluctant to implement further loosening of monetary policy, describing excessive cutting as “counterproductive”. The Bovespa Index fell steeply, dropping by 29.9% during March and by 36.9% during the first quarter.
The Reserve Bank of India (RBI) cut its key interest rate by 0.75 percentage points to 4.4% in an unscheduled move designed to tackle the economic impact of the coronavirus. The RBI also cut the Cash Reserve Ratio – which dictates the amount that lenders have to hold in reserve – by one percentage point to 3% in order to boost liquidity. The CNX Nifty Index fell by 23.2% during March and by 29.3% during the first three months of the year.
Europe Market Review
European investors experienced a torrid March as the coronavirus spread and intensified across the region. Major equity markets posted double-digit losses over the month and the quarter as lockdowns were imposed and toughened. Italy and Spain were particularly hard-hit, according to the World Health Organisation (WHO), which reported 101,739 cases of Covid-19 and 11,591 deaths in Italy, and 85,195 cases and 7,340 deaths by the end of March.
“Extraordinary times require extraordinary action” (IMF Managing Director Christine Lagarde)
In Germany, the Dax Index fell by 16.4% over the month and by 25% since the start of the year. France’s benchmark CAC 40 Index fell by 17.2% during March and by 26.5% during the first quarter, and Italy’s FTSE MIB Index posted a monthly decline of 22.4% and a quarterly drop of 27.5%.
President of the European Central Bank (ECB) Christine Lagarde described the crisis as: “something that is different from the great financial crisis … We analyse it as a crisis that is fuelled by a supply shock, followed by a demand shock, and with great financial uncertainty”. She urged European leaders to work together to tackle the crisis. Alongside measures taken at federal level, individual European governments launched packages designed to shore up their economies and businesses. In the UK, the Financial Conduct Authority (FCA) temporarily banned short-selling of shares in a long list of Italian and Spanish firms, following similar action by the European Securities & Markets Authority (ESMA).
Although ECB officials did not cut its key interest rate any further, they unveiled a new “Pandemic Emergency Purchase Programme” (PEPP), a package of measures worth €750 billion that is designed to alleviate the impact of the coronavirus. President Lagarde subsequently tweeted: “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate”. According to credit ratings agency Fitch, the PEPP reduces financing risk for the eurozone’s sovereigns and will help to facilitate their fiscal responses to the coronavirus crisis. Fitch believes that the programme’s size and flexibility will help to ease potential refinancing risks for the eurozone sovereigns that have been worst affected by the coronavirus. It will also enable the ECB to absorb bonds that will be issued to finance fiscal easing in response to the economic contraction by the lockdowns.
Global Bond Market Review
Bond yields fall to new lows
Having fallen steeply during February, global bond yields continued their decline in March. As the coronavirus continued its spread, more countries instigated lockdowns and businesses and factories shut down, and travel was restricted, fuelling concern that a global recession is brewing. Bond prices rose and share prices plunged as investors shunned riskier assets in favour of perceived safe havens, and the CboE Volatility Index (VIX), which measures volatility in stocks in the S&P 500 Index, rose to its highest level since 2008.
“The yields on the ten-year and 30-year Treasury bonds fell to all-time lows”
The yields on the ten-year and 30-year Treasury bonds fell to all-time lows during March. The yield on the benchmark US Treasury bond dropped from 1.15% to 0.66%, plumbing a low of 0.38% during the month. Meanwhile, the yield on the 30-year Treasury bond fell from 1.68% to 1.32%, dropping as low as 0.69% during the month.
Central banks around the world cut interest rates in a bid to combat the economic impact of the virus. Countries that eased rates included the US, the UK, Canada, Australia, South Korea, Malaysia, Iceland, Norway, Brazil and India. According to the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, the outlook for global growth in 2020 is negative, and she expects “a recession at least as bad as during the global financial crisis or worse”.
Social distancing measures have damaged short-term growth prospects, according to credit ratings agency Standard & Poor’s (S&P), which expects the drop in economic activity and “risk-off” activity in financial markets to place “significant pressure” on creditworthiness worldwide. Defaults are likely to be particularly prevalent in industries with significant exposure to the impact of social distancing and plummeting global demand – such as airlines, transportation and retailing – and those that rely on cross-border supply chains, which are likely to come under pressure from collapsing cash flows and tighter financing conditions.
Credit ratings agency Fitch affirmed its “AAA” rating for the US with a “stable” outlook, citing the size of the US economy, its high per-capita income, its “dynamic” business environment, and the US dollar’s ongoing status as the world’s foremost reserve currency. Nevertheless, Fitch also examined threats that are beginning to erode the credit strengths of the US, including high fiscal deficits and debt alongside the shorter-term economic and fiscal impact of the coronavirus.
UK Bond Market Review
UK interest rates reach all-time low
Against the backdrop of heightened uncertainty caused by the intensifying coronavirus crisis, investors continued to lose their appetite for risk during March, and government bond yields continued their decline. Over March as a whole, the yield on the benchmark UK gilt fell from 0.44% to 0.35% and the pound posted a sharp decline against the US dollar.
“The Bank of England reported a deterioration in conditions in the UK gilt market”
The Pension Protection Fund (PPF) warned that a sharp drop in bond yields increases the deficit in defined-benefit pension schemes. According to the PPF’s ‘Purple Book’, a fall of 0.1 percentage point fall in nominal and real gilt yields increases defined benefit pension scheme liabilities by 1.9%.
The Bank of England (BoE) reported a deterioration in conditions in the UK gilt market as investors focused on “shorter-dated instruments that are closer substitutes for highly liquid central bank reserves”. During the month, BoE policymakers implemented two emergency interest-rate cuts, reducing the key base rate from 0.75% to 0.25%, and finally to a fresh all-time low of 0.1%. Warning of the “risk of an economic shock that could be sharp and large, but should be temporary”, the central bank also increased its programme of asset purchases to £645 billion. Andrew Bailey took over in March as Governor of the BoE from Mark Carney and will serve an eight-year term.
During March, Chancellor of the Exchequer Rishi Sunak unveiled a Budget designed to address the economic impact of the coronavirus, including measures to extend Statutory Sick Pay and to relieve pressure on medium-sized and smaller companies. The Office for Budget Responsibility (OBR) described the Budget as “the largest sustained fiscal loosening” since 1992. The OBR downgraded its economic growth forecast for the UK this year from 1.4% to 1.1%, although this prediction was published before the coronavirus crisis deepened. Later in the month, the Chancellor announced additional measures to provide additional economic support and to help the self-employed, warning: “We have never, in peacetime, faced an economic fight like this one”.
UK economic growth remained flat in the three months to January, and the annualised rate of consumer price inflation eased from 1.8% in January to 1.7% in February. Inflation is expected to have fallen further in March, dragged down by falling fuel prices and a steep decline in demand for non-essential consumer goods and services.
UK Equity Market Review
On the back foot
UK share prices plunged during March as the coronavirus continued to sweep the world. Shops, schools, leisure facilities and workplaces were forced to close as a lockdown was imposed in the UK to stem the spread of the virus, and UK companies took steps to reinforce their balance sheets, cancelling dividend payouts and share buybacks, and postponing non-essential capital expenditure. In particular, the UK banking sector came under intense pressure to bolster their finances by scrapping dividend payments and, as March drew to a close, the major lenders agreed to cancel their payouts.
“The Bank of England announced two emergency cuts in interest rates”
According to the World Health Organisation (WHO), 22,145 cases of Covid-19 had been diagnosed in the UK by the end of March, with 2,619 deaths recorded. The FTSE 100 Index fell by 13.8% over March and by 24.8%% over the year to date. Meanwhile, the FTSE 250 Index fell by 21.9% over the month and by 31% over the quarter.
The Government announced a range of measures designed to shore up the UK economy against the impact of the coronavirus. The initial measures were announced in the Budget, and included greater access to Statutory Sick Pay and support for medium-sized and smaller business. Later in the month, Chancellor of the Exchequer Rishi Sunak went on to announce a package of additional stimulus measures worth £350 billion – including a business rates holiday, support for companies in the retailing, hospitality and leisure sectors – and provision for the self-employed.
The Bank of England (BoE) announced two emergency cuts in interest rates that reduced its key interest rate from 0.75% to 0.1%, representing its lowest level since the central bank was established in 1694. The BoE also extended its programme of quantitative easing measures. The central bank predicted a sizeable fall in global economic growth in the first half of 2020, warning of a “very sharp reduction in activity”, and pledged to expand its economic stimulus further if necessary.
Retail sales plunged in March, according to the Confederation of British Industry (CBI), with retailers expressing the most pessimism since April 2009. Although sales in food shops rose steeply, boosted by stockpiling activity, purchases of non-essential items declined. Retailer WH Smith issued a profit warning, while shopping centre operator Intu and cinema operator Cineworld both reported that they were at risk of breaching their debt covenants.
UK Equity Income Market Review
UK companies cancel dividends
Although March was painful for most investors, income-seeking investors probably felt an additional level of pain. As UK interest rates fell to an all-time low of 0.1% and gilt yields plunged, a raft of UK companies cancelled their dividends in a move designed to shore up their balance sheets. As well as affecting stock market returns, a sharp drop in dividend income will have a significant impact on investors who depend on the payments for their income.
“Having come under intense pressure, UK banks agreed to scrap dividend payouts”
The FTSE 100 Index fell by 13.8% during March and by 24.8% over the first three months of the year. Meanwhile, the FTSE 250 Index fell by 21.9% over the month and by 31% over the quarter. In March, the yield on the FTSE 100 Index increased from 5.01% to 5.78%%, while the FTSE 250 Index’s yield rose from 3.42% to 4.26%. In comparison, the yield on the benchmark UK gilt fell from 0.44% to 0.35%.
UK dividend payouts reached record levels during 2019, according to Link Asset Services’ Dividend Monitor, rising to £110.5 billion over the year. 2020, however, is set to look slightly different as some of the biggest payers have cancelled their dividends in the face of the unfolding coronavirus crisis.
Having come under intense pressure, UK banks agreed to scrap dividend payouts and share buybacks for the rest of 2019 through 2020. The move bolsters the banks’ scope to absorb financial shocks, and also boosts their ability to lend to companies and households. Banks will also refrain from paying cash bonuses to their senior executives. The most immediate impact to this decision was felt by Barclays’ investors, who had been due to receive their full-year payout early in April. In a separate move, the Prudential Regulation Authority (PRA) urged insurance companies to think before making any moves to pay dividends or bonuses.
Marks & Spencer cancelled its final dividend and abandoned non-essential capital spending. High-street retailer Next said that it still aims to pay a dividend, but will defer its decision until June. InterContinental Hotels cancelled its dividend, while hotel and restaurant operator Whitbread cancelled its payout and cut all discretionary spending. Elsewhere, builders’ merchant chain Travis Perkins scrapped its dividend and paused the demerger of DIY chain Wickes. On a brighter note, investment trust Alliance Trust increased its dividend for a 53rd consecutive year.
US Market Review
US rates fall to near-zero
Share prices fell sharply in the US during March as the coronavirus pandemic continued its spread, and the yields on ten-year and 30-year Treasury bonds fell to all-time lows. President Donald Trump declared a national emergency and the Senate passed a coronavirus aid bill worth US$2 trillion. The package included direct payments of US$1,200 to adults earning US$75,000 or less, with US$500 for each child, alongside additional unemployment aid, help for businesses, and US$100 billion-worth of health care spending. By the end of March, the World Health Organisation (WHO) reported 140,640 cases of Covid-19 had been diagnosed in the US, with 2,398 deaths recorded.
“The Fed implemented two consecutive emergency cuts in interest rates”
The Dow Jones Industrial Average Index dropped by 13.7% in March, and by 23.2% over the first three months of the year. Meanwhile, the S&P 500 Index fell by 12.5% during March, and by 20% over the first quarter and the Nasdaq Index declined by 10.1% over the month and by 14.2% over the first quarter. During March, every S&P industry sector ended the month in negative territory. The worst-performing sector was energy, which fell by almost 35%, followed by financials and industrials, which dropped by 21.5% and 19.3% respectively. The best-performing sector was health care, which fell by only 4%.
Eight major US banks issued a joint statement announcing that buybacks would be suspended until the second half of 2020, and promised to use their “significant” capital and liquidity to support businesses and individuals. According to S&P Dow Jones Indices, suspensions of buybacks were running at 25% of 2019 buybacks at the end of March, with suspensions in the financials sector reaching 72%. Looking further ahead, the buyback outlook for the second quarter is described as “dismal”.
During March, the Federal Reserve (Fed) implemented two consecutive emergency cuts in interest rates, bringing down the key federal funds rate to a range of 0% to 0.25% in a bid to shore up the economy. The federal funds rate has not been so close to zero since 2008. The central bank also extended its programme of asset purchase.
The nomination process for the Democratic Party’s presidential candidate was disrupted by the virus. Former Vice President Joe Biden remained the front runner, ahead of Bernie Sanders; the nomination process finishes in July and the US election is scheduled to take place in November.