WeeklyWatch – Partial lockdown lifts help markets rally

15 April 2020

Stock Take

To the great relief of children (and parents) all around, the Easter Bunny is considered an essential worker – so said the New Zealand Prime Minister Jacinda Ardern in an announcement last week. It was the perfect piece of egg-shaped comfort to help see us through perhaps the strangest Easter of recent years.

Here in the UK, the news that Prime Minister Boris Johnson is on the road to recovery was undoubtedly a lift in general spirits, however it was a small glimmer of brightness amidst another week of grim and staggering statistics. The number of confirmed coronavirus cases has reached 1.6 million globally, while the number of dead now stands at 100,000.

A staggering 81% of the global workforce is now living under full or partial lockdowns, according to the International Labour Organization, while 1.25 billion workers around the world could face hardship as jobs, working hours and pay are cut. In the US, more than 16 million are now unemployed and seeking benefits.

In a prediction that reflects the uncertainty about the impact of the pandemic, the World Trade Organisation has predicted a contraction of between 13% and 32% this year; the most optimistic forecast assuming a steep drop in trade followed by recovery in the latter half of 2020. This scenario relies on significant progress in controlling the virus over the next few months.

A growing number of companies are also reconsidering shareholder dividend plans, due to fears about cash reserves in the face of the downturn. As of last week, 45% of London-listed companies had cancelled or postponed their anticipated pay-outs.

Lockdown lifts

It was a guaranteed quiet bank holiday weekend as the UK lockdown continues for the foreseeable future – in fact, road traffic has fallen by 73% since the measures were put in place, levels not seen since 1955.

Elsewhere, however, Norway, Denmark and Austria announced plans to ease restrictions – Wuhan, the Chinese city in which the outbreak began, partially lifted their months-long lockdown last week. Even Spain and Italy are considering limited easing of their restrictions as daily new infections and deaths have begun to decline.

EU finance ministers have now agreed to a €500 billion rescue package that will help those European countries hit hardest by the pandemic – French finance minister, Bruno Le Maire, hailed the plan as the most important in EU economic history.

Temporary rally?

The news of flattening coronavirus curves throughout Europe combined with some easing of lockdowns certainly encouraged the stock markets around the globe – Wall Street’s S&P 500 gained 7% last Monday and registered its eighth-best day since WWII, and by midweek it had broken out of bear market territory, up more than 20% from its March low. Germany’s DAX index then matched this feat, and by the end of the week US stocks had registered their best weekly gain in 46 years.

Mark Dowding of BlueBay, co-manager of the St. James’s Place Strategic Income fund, said: “We believe that it is premature to think that we have reached a turning point in the pandemic. News flow is likely to remain challenging for some time – particularly in regions such as the southern states of the US, which have been slow to embrace social distancing. It seems unlikely that markets will be able to trend in a straight line, though there are reasons to believe that many markets are past their lows, as long as policymakers are able to continue taking appropriate measures in the weeks ahead.”

Given that the US is likely to be the last to reach its COVID-19 peak, however, there are some justified concerns that the length of their economic recovery is being underestimated. The US welfare system could also be a factor; Keith Wade, chief economist at Schroders, said that “The US economy is a ‘hire and fire’ culture unlike the more developed welfare system in Europe, which has seen employees furloughed instead. We still think the GDP hit in Europe will be greater than the US in the short term, but that it has a better strategy for recovery because workers can be brought back in more quickly.”

This weekend’s slump in oil demand, caused by the coronavirus, led the world’s biggest oil producers to finally agree a cut in output of nearly ten million barrels a day, hoping to boost prices – the price war between Russia and Saudi Arabia had seen Brent crude fall to its lowest level in 18 years. President Trump hailed the deal as a “Great deal for all!”, which would “save hundreds of thousands of energy jobs in the United State”.

The importance of the state of the US economy is not lost on Trump when it comes to his re-election prospects, after learning last week that his Democratic opponent for the election in November will be Joe Biden – Bernie Sanders withdrew from the race last Wednesday.

Wealth Check

Last month’s Budget already seems like a distant memory, and who can remember when Brexit was our biggest worry? The first quarter of 2020 has definitely been one that investors would like to forget, although they are very unlikely to. UK and US equities both suffered their worst quarter since 1987, losing 25% and 23% respectively.

Market shocks like this one do offer potential, however, in the risks investors take for the higher long-term returns possible from the stock market. Analysis by Schroders shows that the US market has fallen 25% or more 11 times in the last 148, so what can we learn about how long it took to recover those losses, and whether you should sit tight or cash out?

Financial Express. Data shown in both tables is for the S&P 500 Total Return Index. Past performance is not a guide to future returns.

What the above shows us is that, in seven of the eleven occasions, those who sat tight would have returned their pre-cash value in two years or less. By contrast, investors who switched to cash after the first 25% of losses in 2001 (dotcom crash) and 2008 (global financial crisis) would still be out of pocket. When you first look at it, it may seem like a very long time to wait for those who stayed invested in the market, but if you compare the waiting time to how long it would have taken to recoup losses after switching to cash, it doesn’t seem so much.

The market turmoil has had another unprecedented effect on the UK interest rates too – after having fallen to their lowest level in history, they look set to remain that way for some years to come. This means that investors jumping to cash have effectively given up any hope of recovering the money lost during this correction.

Of course, it can seem very difficult to simply sit tight – not least because the recent market lows may well be tested again as the economic damage of COVID-19 becomes clearer – but investors who are able to manage it are more likely to end up better off in the long run.

In the picture

The start of the tax year saw the Junior ISA annual allowance jump to £9,000, which in turn affords great opportunities for parents and other family members to create funds for the future and instil a strong savings discipline – an early start can make all the difference.

With the effects of compounding, investing £9,000 a year from birth can result in an impressive approximate extra return of £1 million at age 65, compared to starting just five years later (assuming 5% p.a. growth rate).

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

The Last Word

“When we get through this – and we will get through this – it will be because of our NHS staff, our care workers, our ambulance drivers, our emergency services, our cleaners, our porters. They are the best of us.”.

– Kier Starmer, Leader of the Opposition

Magellan and Schroders are fund managers for St. James’s Place.

BlueBay and Schroders are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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