A selection of articles looking back through the markets last month.
Global Market Review
Pandemic continued to dominate markets
The rebound in equity markets extended into May. The impact of the COVID-19 pandemic continued to dominate markets, with an increasing focus on how countries would begin to relax their lockdown measures and how this would affect the economy. Volatility declined and the more moderate market moves compared to April suggest that investors are being watchful of how the situation develops.
“Investors appeared… more optimistic about the outlook”
Many states in the US began some level of reopening, though the daily infection rate only fell to around 65% of the peak infection rate from mid-April. The S&P 500 climbed to end the month 4.8% higher despite renewed tensions in US-China relations, and was just 10% below the February peak.
The infection rate across the major European economies fell significantly, though the infection rate in the UK still remained high relative to its European peers. The Eurostoxx 600 closed up 3.02%, boosted by bank and travel stocks as the European Union proposed a coronavirus recovery plan. In the UK, the government’s plan for reopening the economy sent the FTSE 100 up. Germany’s IFO Business Climate Index rose to 79.5 in May, beating consensus estimates, as expectations for the coming months “improved considerably.” Meanwhile, the European Commission proposed a Recovery Fund of 750 billion euros to its member states.
The Japanese government enacted another 117 trillion yen in relief spending, bringing total fiscal stimulus to 234 trillion yen –roughly 40% of GDP.
Investors appeared to become somewhat more optimistic about the outlook after initial signs of success in human trials of a vaccine against COVID-19. Growth stocks outperformed value stocks while global government bond markets were broadly flat. European and Japanese stock markets, typically cyclical markets, ended the month higher.
Asia & Japan Market Review
Concerns over Hong Kong’s future
Share prices in Hong Kong dived during May on the news that China was set to make national security laws for the territory, clamping down on dissent and raising questions over Hong Kong’s special economic status. US Secretary of State Mike Pompeo warned that this would be “a death knell for the high degree of autonomy” that Beijing had promised for Hong Kong. In response, the Chinese authorities asked the US to stop “meddling” in Hong Kong’s internal affairs. Elsewhere, the territory’s recession deepened during the first three months of 2020 as the economy contracted by 5.3% quarter on quarter. Activity was hampered by a sharp drop in tourism and weak exports; exports of goods declined at an annualised rate of 9.7%, while exports of services dropped by more than 37%. The Hang Seng Index fell by 6.8% during May.
“Japan’s economy moved into recession”
Japan’s economy moved into recession during the first quarter: having already contracted in the fourth quarter of 2019, the country’s economy shrank by 3.4% year on year during the first three months of 2020, dragged down by deteriorating demand and weak export activity. Exports fell at an annualised rate of 21.9% during April, while imports dropped by 7.1%. Over May, the Nikkei 225 Index rose by 8.3%, while the Topix Index and the TSE Second Section Index climbed by 6.8% and 8.9% respectively.
The Bank of Korea (BoK) cut its key interest rate by 25 basis points to a record low of 0.5%. The central bank also reduced its forecast for economic growth this year from 2.1% to 0.2%, before recovering to grow by 3.1% in 2021, and downgraded its inflation forecast for 2020 from 1% to 0.3%. The Kospi Index rose by 4.2% in May.
The Reserve Bank of Australia (RBA) maintained its key interest rate at 0.25% during May, but policymakers predict that the coronavirus pandemic could result in a 10% decline in GDP during the first six months of 2020 and warned that “an economic contraction of such speed and magnitude would be unprecedented in the 60-year history of Australia’s quarterly national accounts”. Nevertheless, although interest rates are predicted to remain unchanged for some time, the RBA does not expect to need to expand quantitative easing measures or to resort to using negative interest rates. The ASX All Ordinaries Index rose by 4.9% over the month.
Emerging Markets Review
Clouded outlook for China’s growth
China’s National People’s Congress (NPC) announced that it would not set an economic growth target for the country this year as it addresses the impact of the coronavirus pandemic. Premier Li Keqiang said: “Our country will face some factors in its development that are difficult to predict due to the great uncertainty regarding the COVID-19 pandemic and the world economic and trade environment”. China’s economy contracted by 6.8% during the first quarter.
“Brazil’s GDP is expected to contract more severely in the second quarter”
China also revealed controversial plans to impose national security laws upon Hong Kong that are set to undermine the territory’s special economic status. The announcement triggered criticism from other countries, including the US, where the Senate passed legislation that will compel US-listed Chinese companies to delist if they fail to comply with US auditing standards.
China’s exports rose for the first time in 2020 during April, posting an annualised increase of 3.5%. However, imports dropped by 14.2% year on year in April, having fallen by only 0.9% in March. Over May, the Shanghai Composite Index fell by 0.3%.
Brazil’s economy shrank by 1.5% quarter on quarter during the first three months of the year. This was Brazil’s biggest contraction since the second quarter of 2015, when it contracted by 2.1%, and the country’s statistical agency calculates that, as a result, GDP is at a similar level to the second quarter of 2012. Household consumption fell by 2% as the country reacted to the coronavirus, representing its most substantial decline since 2001. Looking ahead, Brazil’s GDP is expected to contract more severely in the second quarter as the country’s lockdown takes effect on growth.
Brazil’s central bank cut its key Selic rate by 0.75 percentage points to 3%. The monetary policy committee – known as the Copom – said it would reduce rates again in June by the same amount if necessary. The Bovespa Index rose by 8.6% during May.
The Reserve Bank of India (RBI) cut its key interest rate by 40 basis points to 4% in May, and also extended a moratorium on loans from three to six months. Governor Shaktikanta Das warned that India’s economy is likely to contract in the 2020/21 fiscal year. Looking ahead, higher food prices are set to drive up inflation, but the RBI believes the outlook for growth poses the principle risk. Over May, the CNX Nifty Index fell by 2.8%.
Europe Market Review
Is Europe heading for deflation?
Lockdown restrictions continued to ease across Europe during May. Schools, shops, bars and restaurants began to reopen and quarantine restrictions were relaxed. During May, the Dax Index rose by 6.7% while the CAC 40 Index climbed by 2.7%. By the end of May, the World Health Organisation (WHO) had confirmed 2.1 million cases of COVID-19 across pan-Europe, with 180,085 deaths recorded.
“The pandemic has amplified the European financial sector’s existing vulnerabilities”
The European Central Bank (ECB) expects the eurozone’s economy to contract by between 5% and 12% this year with a medium scenario of -8%, according to ECB President Christine Lagarde. France fell into recession at the end of April, and Italy followed suit in May.
The pandemic has amplified the European financial sector’s existing vulnerabilities, according to the ECB’s Financial Stability Review. Key risks include “richly valued” asset prices, question-marks over the sustainability of sovereign and corporate debt, “fragile” investment funds, and pressure on banks’ profitability.
Concerns over the possibility of deflation in the eurozone intensified during May as the rate of inflation in the region fell to 0.1%, pulled down by a 12% decline in energy prices. The news stoked expectations that the ECB would expand its programme of asset purchases in June. Eurostat reported that several individual eurozone members – including Greece, Ireland, Italy, and Portugal – experienced deflation during May. The ECB’s inflation target remains “below, but close to, 2%”.
The European Commission (EC) cut its economic forecasts for the eurozone during the month; the EC now expects the eurozone’s economy to contract by 7.75% this year. The economies of Germany and France are expected to contract by 6.5% and 8.2% respectively during 2020; meanwhile, Italy, Spain and Greece are all forecast to shrink by almost 10%. The eurozone’s economy is predicted to rebound by 6.25% in 2021, but the speed and strength of recovery in each member state will depend on the speed at which lockdowns are lifted, its economy’s exposure to tourist income, its structure, financial resources and debt levels, and its individual government policies.
European Commissioner for the Economy Paolo Gentiloni commented: “Europe is experiencing an economic shock without precedent since the Great Depression. Both the depth of recession and the strength of recovery will be uneven”. He also warned that divergent performance from the individual member states “poses a threat to the single market and the euro area”.
Global Bond Market Review
Corporate defaults on the rise
US Treasury bond yields rose during May: government spending continued to rise and central bank policy showed signs of shifting as Federal Reserve (Fed) Chair Jerome Powell emphasised that the Fed would take all necessary action to support the US economy, and had not “run out of ammunition by a long shot”. The ten-year US Treasury bond yield rose from 0.62% to 0.66% over May, but dipped towards the end of the month as relations between the US and China worsened. US ten-year Treasury bond yields have remained below 1% since mid-March. Meanwhile, the 30-year US Treasury bond yield rose from 1.27% to 1.41%.
“US ten-year Treasury bond yields have remained below 1% since mid-March”
The global rate of corporate defaults reached their highest year-to-date levels since 2009, according to S&P Global Ratings, which found that defaults across all regions increased as social distancing measures and lockdowns hampered economies. Consumer products led the global default count, followed by media and entertainment. Overall, the most common cause of default so far this year has been missed interest and principal payments.
Credit ratings agency Fitch found that the percentage of issuers with a “negative” rating outlook has posted a significant global increase across sectors as the impact of the pandemic has intensified. Financial institutions have experienced the most substantial increase in revisions from “stable” to “negative”. Fitch downgraded its forecasts for global economic growth in 2020, and now expects the global economy to contract by 4.6% this year, compared with an earlier forecast of -3.9%. At a regional level, Fitch maintained its forecasts for the US, China and Japan, but cut its outlooks for the eurozone, India, Brazil, and the UK. Looking further ahead, Fitch does not expect pre-virus levels of GDP to return until at least mid-2022 in the US, and even later in Europe.
After experiencing outflows of £7.4 billion in March, investors’ appetite for fixed income funds recovered in April, resulting in net retail inflows of £903 million. Demand for funds in the Global Bonds sector rebounded during the month, according to the Investment Association (IA) , and the sector was ranked in the top ten most popular IA sectors for April. Other fixed income sectors that appeared in the top ten included £ Corporate Bond, £ High Yield, and £ Strategic Bond, which staged a strong comeback after ranking in last place during March.
UK Bond Market Review
BoE keeps its options open
Demand for gilts remained strong during May as the economic outlook continued to deteriorate. The coronavirus pandemic is expected to take a heavy toll on UK and global growth; the UK economy contracted by 2% during the first quarter of 2020, posting its heaviest fall since the fourth quarter of 2008. The Office for National Statistics (ONS) reported “widespread” falls across most sectors; the services sector contracted by 1.9%, production by 2.1%, and construction by 2.6%. Over March, the economy contracted by 5.8% month on month, and the services sector dropped by a record 6.2%.
“The Government issued a tranche of three-year gilts with an effective negative interest rate”
The annualised rate of consumer price inflation declined to its lowest level since August 2016 during April, falling from 1.5% in March to 0.8%, and driven down by lower fuel and energy prices. Demand for gilts has been fuelled by growing speculation that inflation will continue to weaken, and by expectations that the Bank of England (BoE) could extend its programme of asset purchases. During May, the Government issued a tranche of three-year gilts with an effective negative interest rate of 0.003%. This is highly unusual because it means that, at maturity, investors will not be paid back in full.
The BoE believes that the UK economy could contract by as much as 14% this year, before rebounding in 2021 to grow by 15%. Unemployment is tipped to rise as high as 9% – its highest level since 1994.
In his evidence to the Treasury Select Committee, BoE Governor Andrew Bailey said that bigger companies that were already overindebted before the coronavirus pandemic had to take responsibility for this; however, he emphasised that more debt was not the answer to the problem. BoE policymakers are keeping monetary tools – including the possibility of negative interest rates – “under active review”, and the Governor commented: “It is quite a nuanced policy tool … We are not ruling it in, but we are not ruling it out”.
Manufacturing output volumes fell at their fastest rate on record in the three months to May, according to the Confederation of British Industry’s (CBI’s) monthly Industrial Trends Survey, as manufacturers struggled with collapsing demand and disruption to supply chains. The motor vehicles & transport equipment and the food, drink and tobacco subsectors were particularly badly hit. Total order books fell to their lowest level since 1981.
UK Equity Market Review
UK retail sales plunge
UK share prices continued to rally during May as investors became more hopeful that the lockdown would lift, and the economy could restart. Prime Minister Boris Johnson confirmed that retailers selling non-essential items would be allowed to open from mid-June. Car showrooms and outdoor markets could reopen from 1 June, and different households can meet in small, socially distanced groups from the beginning of June. As social distancing measures are lifted, the Confederation of British Industry (CBI) expects the UK to experience a “significant economic contraction, followed by recovery”. By the end of May, the World Health Organisation (WHO) had confirmed 272,830 cases of COVID-19 in the UK, with 38,376 deaths recorded.
“Companies have continued to come under pressure to scrap dividend payments”
As the UK Government increased spending to alleviate the impact of the pandemic, Government borrowing rose to £62.1 billion during April, reaching its highest level in any month on record. Concerns rose over the prospect of a surge in redundancies once Government support for businesses is withdrawn.
During May, the FTSE 100 Index rose by 3%, while the FTSE 250 Index climbed by 3.6%. Medium-sized companies performed particularly well as investors turned to domestically focused businesses that are perceived likely to benefit as the economy reopens. Since the start of the year, the FTSE 100 Index and the FTSE 250 Index have fallen by 19.4% and 22.1% respectively, and companies have continued to come under pressure to scrap dividend payments.
Having fallen by 5.2% in March, retail sales volumes plunged by 18.1% during April, achieving their steepest monthly drop ever recorded. Meanwhile, the proportion spent online surged to an all-time high of 30.7%. Commercial property company Land Securities expects rent receipts from retail tenants to fall by up to 75% over the next year, while rent receipts from office tenants could decline by 20%. Elsewhere, property company British Land reported a £1.1 billion full-year loss that was exacerbated by its exposure to the struggling retail sector.
According to a survey undertaken by the Bank of England (BoE), the pandemic has superseded Brexit to become the biggest threat to the UK economy in the eyes of the British public. During the month, the Department for International Trade unveiled the new UK Global Tariff, under which around 60% of trade will enter the UK tariff-free from 1 January 2021 when the Brexit transition period ends.
UK Equity Income Market Review
Companies continue to cancel dividends
The outlook for income-seeking investors continued to deteriorate during May as companies sought to shore up their balance sheets by cancelling dividend payouts. Whilst giving evidence to the Treasury Select Committee during the month, Bank of England (BoE) Governor Andrew Bailey reiterated his advice to businesses to scrap payments. Moreover, companies that take advantage of the COVID Corporate Financing Facility (CCFF) will be expected to provide a letter to HM Treasury that “commits to showing restraint on the payment of dividends” and on cash bonuses to management. According to Janus Henderson’s Global Dividend Index, the best-case scenario for global dividends in 2020 sees a 15% decline to US$1.21 trillion – a drop of US$213 billion. In comparison, the worst-case scenario sees a drop of 35% to US$9.33 billion.
“BoE Governor Andrew Bailey reiterated his advice to businesses to scrap payments”
Yields continued to weaken during May: the yield on the FTSE 100 Index declined from 5.22% to 4.96%, while the FTSE 250 Index’s yield fell from 3.89% to 3.75%. Meanwhile, the benchmark UK gilt yielded 0.19% at the end of the month. During May, the FTSE 100 Index rose by 3%, while the FTSE 250 Index climbed by 3.6%. FTSE 100 Index constituent Whitbread suspended its final dividend and announced a rights issue designed to raise £1 billion. In contrast, automotive parts company TI Fluid Systems was prevented from paying its final dividend following a shareholder vote at its AGM.
Over the year to date, most FTSE industry sectors are in negative territory, with the majority posting double-digit negative performance. The best-performing FTSE sectors include leisure goods, technology hardware & equipment, pharmaceuticals & biotechnology, health care, and food & drug retailers. At the other end of the performance spectrum, the worst-performing sectors – which have all fallen by more than 35% – include oil equipment & services, automobiles & parts, banks, oil & gas producers, fixed-line telecoms, and travel and leisure.
Having suffered record outflows in March, retail funds experienced net retail inflows of £4 billion during April, according to the Investment Association (IA), with actively managed funds attracting almost two-thirds of investors’ money. Equity funds enjoyed net retail sales of £2.4 billion, and the UK All Companies sector was the second most-popular IA sector behind Global. Investors’ appetite for funds in the UK Equity Income sector rebounded sharply, and UK Smaller Companies funds also experienced an uptick in demand.
US Market Review
US/China relationship sours again
Relations between the US and China deteriorated further during May as the US blamed China and the World Health Organisation (WHO) for the pandemic. The US Senate passed the Holding Foreign Companies Accountable Act, in which US-traded issues are required to surrender their listings on US exchanges if they do not comply with US audits, following which President Donald Trump terminated support for the WHO. By the end of May, the WHO had confirmed over 1.7 million cases of COVID-19 in the US, with 101,567 deaths recorded.
“President Donald Trump terminated support for the WHO”
The Dow Jones Industrial Average Index rose by 4.3% during May, while the S&P 500 Index climbed by 4.5% and the Nasdaq Index rose by 6.8%. Although most equity indices remained in negative territory over the year to date, the Nasdaq Index was one of the few to buck the trend: by the end of May, the technology-rich index had risen by 5.8%.
Every sector in the S&P 500 Index ended May in positive territory. The best-performing S&P sector during the month was information technology, followed by materials, and communication services; in comparison, energy was the weakest performer, followed by consumer staples and real estate.
As the US continued to reopen, Federal Reserve (Fed) Chair Jerome Powell warned that the outlook remained “highly uncertain and subject to significant downside risks”; nevertheless, he reiterated that the central bank had not “run out of ammunition by a long shot” and would take whatever action was necessary to support the economy. The Congressional Budget Office (CBO) expects US economic growth to fall by 38% year on year during the second quarter. Weekly unemployment claims rose to almost 41 million by the end of May and while they are expected to continue to climb, the rate of increase is set to moderate.
Although government stimulus payments increased personal income by 10.5%, consumer spending fell at a monthly rate of 13.2% in April. The personal saving rate climbed to 33%. Meanwhile, retail sales tumbled, posting a month-on-month drop of 16.4%. The decline spanned almost every sector: in particular, sales at clothing stores fell by 78.8%, while electronics & appliances dropped by 60.6% and furniture & home furnishing slumped by 58.7%. Credit card spending is estimated to have fallen by 40%, and several well-known retailers – including J.C. Penny, J. Crew, and Neiman Marcus – declared bankruptcy.