OCM Commentaries

Market Commentary 13th May 2020

By May 13, 2020 May 26th, 2020 No Comments

The UK Eases Lockdown Restrictions

Economic data releases over the week provided more insight into the extent of the impact of the coronavirus outbreak on the UK economy over the first quarter of the year. According to the data, Britain’s economy shrank by a record 5.8% in March, contributing to a 2% fall in GDP in the first quarter of the year as the coronavirus crisis escalated and the government shut down much of the country. The sharp contraction comes as little surprise however, with evidence of the economy coming to a halt in front of our eyes since March in the form of shuttered restaurants and shops, to building sites and factories. The sharp decline is only a small part of the damage of the coronavirus lockdown, which was in place for all of April and is set to endure in some form for months to come. The measures heaped misery on an already sluggish economy, with the Bank of England foreseeing a staggering 25% contraction this quarter as part of the deepest slump in more than three centuries.

The economy has now failed to grow for three of the previous four quarters, after months of political and Brexit uncertainty meant the UK entered the latest crisis on a weak footing. The GDP figures highlight the monumental task the government faces as it begins to take small steps toward easing the lockdown, however recent unprecedented actions from policymakers in a bid to prop up the ailing economy have so far limited the lasting impact of the near term economic weakness. Over the week, the government renewed its commitment to support the economy through the period as it extended a record aid program for workers, while the Bank of England indicated it is likely to increase stimulus measures to keep the economic machine running over the coming months as activity remains subdued.

England Tentatively Eases Lockdown

In a difficult balancing act between re-starting economic activity and risking a second wave of infections, some lockdown measures have been eased this week in an effort to stimulate the economy in the face of a severe recession. From Wednesday, people in England are able to spend unlimited time outdoors, including meeting one person they don’t live with. People who can’t work from home are being encouraged to go to their jobs. In one significant regulatory shift, the real estate market has been reopened, with house moves once again permitted, and real estate agents allowed to open their offices and show buyers around homes.

The government is trying to avoid a drawn-out L-shape recovery which could lead to a significant number of deaths as a result of people being pushed into poverty or into long-term unemployment. The decision to encourage people to return to work will help pick the economy back up and should mean that April will mark the through in economic activity, with a slow but sure rebound over the second half of the year as more restrictions are eased. The government has faced a barrage of criticism however, with groups claiming crucial details on how companies should prepare for a safe return to work are missing and that the measures could risk the UK experiencing a second wave of infections. Scotland, Wales and Northern Ireland, which have semi-autonomous governments, are sticking with a “stay at home” message for now, leaving England, to take the lead in sending some people back to work.

Bank of England Signals More Stimulus

After the Monetary Policy Committee’s unanimous vote to hold the Bank Rate at a historic low of 0.1% in May and the Bank of England reluctance to go below zero, Quantitative Easing has become the UK’s main policy tool to stimulate the economy in the face of the coronavirus crisis. Two Committee members – Jonathan Haskel and Michael Saunders – voted against the proposal to continue with the £200bn of gilt and corporate bond purchases authorised at the special meeting on 19th March, preferring to increase the scale of purchases by an additional £100bn. Furthermore, Bank of England Governor Andrew Bailey’s pledge to “act as necessary” suggests that bond purchases could be extended for as long as needed, creating a program without limits. Bailey said he makes no distinction between having a target for quantitative easing and an open-ended commitment, as the Federal Reserve and European Central Bank have effectively done.

For more information on central bank warnings over the week and expectations for UK and US monetary policy moving forward, please see the attached Market Update.

Rishi Sunak Extends Furlough Program

The Coronavirus Job Retention Scheme had been due to last until the end of June. But with the economy still stalled and the lockdown remaining largely in place, the government had been urged to keep it going for longer. Chancellor of the Exchequer Rishi Sunak announced this week that the government will help pay the wages of millions of workers for another four months in an effort to avoid a sharp rise in unemployment amid the coronavirus crisis. While officials had considered an extension through September, Sunak’s choice of October came as a surprise.

The extension of the scheme will come as a huge and relief to businesses across the UK, likely helping millions avoid unemployment and aid employers in bringing their staff back to work. The jobs plan has been widely praised by the Bank of England, who credit it with saving millions of jobs and leaving the UK in a better position to bounce back from the crisis, as well as economists, and the general public. The economic cost is making some of his Conservative party uneasy however, with many calling for lockdown measures to be eased quicker.

Our Positioning

It is without doubt that we will continue to see a deterioration in the economic data in the near-term as effects of the lockdown continue to feed through into the lagged data releases, however with more and more countries starting to reopen, we are becoming more optimistic on the medium term outlook.

High levels of intra-day volatility are still expected in the near term, however with activity expected to start to pick up in the coming weeks and months while central banks and governments remain committed to supporting the economy, it is our view that as long term investors, current valuations remain attractive. After locking in an attractive average re-entry point earlier this month, It is our view that this now puts us in a strong position to regain lost ground and more over the long term as the global economy moves into the recovery stage of the cycle.

Key Events We Are Watching This Week:

• Thursday: ECB Economic Bulletin
• Tuesday: UK Unemployment Rate
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global stock markets remained highly volatile over the week as the global economy grapples with the Covid-19 outbreak. After mixed intraday performance, most of the indices gained over the week as optimism over a recovery in economic activity continued to offset concerns over near term weakness.
Following the implementation of portfolio allocation changes earlier this month, the portfolios gained over the week as markets rose. Over the coming weeks, as we are now normally invested, we expect intraweek performance to be more in line with the benchmark once again, and we are optimistic on the medium term outlook from here. The recent drop in portfolios and indices is hugely disappointing, however we remain optimistic about a growth pickup in the second half of the year, allowing us to regain lost ground.

Important Information

Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.

This Day in History

On this day in 1950, the First ever race of the Formula 1 World Drivers Championship was run at Silverstone, England. The race was won by Italy’s Giuseppe Farina in an Alfa Romeo.

Have a great week and stay safe,

Jason & Gina