Medium-Term Optimism Offsets Near-Term Weakness
As we move into May, numerous data releases over the week have begun to paint a clearer picture of the impact of lockdowns on economic activity so far. Over the first quarter of the year, data indicates across-the-board quarterly contractions in activity, despite the fact that most economies that implemented lockdowns generally only did so in March. China aside, the biggest quarterly contractions have been observed in Europe, where the restrictions have been in place for the longest. The US and UK fared slightly better over the quarter, predominantly because the lockdowns began at a later date, indicating that we will have to wait for the second quarter data releases to show the full impact of the lockdowns there.
Although the data is, for the most part, dismal, it did not come as a surprise to investors and economists alike. The GDP and Purchasing managers Index data were broadly in line with market expectations, with the Final Eurozone composite PMI even surprising to the upside. Although the data is terrible, it demonstrates that the economic disruption being observed is wholly as a result from lockdown measures, allowing markets to make more accurate forecasts as economies reopen.
Gradual Return to Normal
After key economies ground to a halt on the implementation of lockdown restrictions earlier in the year, with the measures now starting to be relaxed, it is expected that activity will begin to pick up in the coming weeks and months. Spain, Italy and India have already tentatively eased restrictions with businesses resuming operations this week, while more US states have started to lift their lockdowns over the week. Although it still remains to be seen how quickly these economies can return to normal post-coronavirus, global stock markets have reacted positively as governments hint at further relaxations in restrictions, with investors remaining optimistic over a recovery in the medium term as economic activity restarts.
Over the week, we have received more details from the US and within Europe on plans to re-start the economy moving forward, with Boris Johnson set to lay out the next phase of the UK’s coronavirus strategy later this week. As more countries take steps to reopen, we are likely to start to see a gradual revival in economic activity, with April likely being the trough in the data.
– US
After growing increasingly frustrated with the negative impact of the lockdown on the US economy, President Donald Trump pushed forward with his plans to reopen the nation for business. In a statement yesterday, he acknowledged that the move is unlikely to be without further deaths, however insisted that it’s a cost he has to take to get the economy back on track. With restrictions still in place varying by state, it is hoped that the US economy will start to see a pickup in activity in the coming weeks as the country returns to work.
For more information on the relaxation of US lockdown restrictions and our expectations for the US recovery, please see the attached Market Update.
– Europe
After weeks of unprecedented restrictions on public life, most governments in Europe are now taking small steps to reopen their shuttered economies. The worst-hit countries on the continent, Italy and Spain, removed some curbs on Monday as the coronavirus outbreak continues to show signs of receding.
More than four million people were cleared to return to work in Italy on Monday, including a return to business as usual for the majority of the construction and manufacturing industries. Retailers and museums are set to open on May 18th, and much of the rest of the economy, including bars and restaurants on the 1st June.
The Spanish population was allowed out to exercise over the weekend for the first time in seven weeks, and bars and restaurants are now allowed to serve pre-ordered takeaways. Some countries across Europe are now allowing restaurants to offer takeaways, others are permitting their citizens to get haircuts as well as visit zoos and museums. In Germany, small shops, hardware stores, car dealerships have been open for over a week, and Chancellor Angela Merkel has agreed today to reopen all shops to start easing restrictions on society. German Bundesliga football has also been given the green light to restart.
– UK
The UK’s lockdown is set to begin easing on Monday, as the prime minister confirmed he will set out his exit strategy in a televised address at the weekend. Ministers are trying to find a route out of the lockdown without triggering a second spike of infections that could overwhelm healthcare systems. Though officials say that the U.K. is past the peak, they’ve also warned that any changes to social-distancing measures must ensure the transmissions are kept under control in the absence of a vaccine.
An initial relaxation of the lockdown is expected to be limited, covering outdoor activity including exercise, with further steps coming later in May. As part of its plans to exit the lockdown, the government has already said it will roll out a robust regime of tracking and tracing coronavirus cases. Speaking in Parliament on Wednesday, Boris Johnson set a new goal to raise testing capacity to 200,000 a day by the end of the month, from around 108,000 now.
Our Positioning
As the global economy emerges from the coronavirus pandemic after weeks of strict lockdown restrictions, despite this week’s negative economic data releases, we are becoming increasingly optimistic on the outlook moving forward. 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.
This is not to say that we will not continue to see high levels of intra-day volatility in the near term, however with activity expected to start to pick up in the coming weeks and months, it is our view that as long term investors, current valuations are looking very attractive. For this reason, as explained in last week’s commentary, we took advantage of the drop back in markets towards the end of last week and implemented the stage 3 allocation, putting us back in line with a more normal asset allocation. 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: Chinese trade data for April, BoE interest rate decision, US jobless claims (2nd May)
• Friday: US Non-Farm Payrolls data for April
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 declined over the week after negative data brought markets lower over Thursday and Monday, with key markets being closed on Friday for national holidays.
Following the implementation of portfolio allocation changes towards the end of last week, the portfolios declined over the week, however the brief decline provided us with an opportunity to top up risk asset exposure and redeploy cash at more attractive levels, putting us in a strong position moving forward. 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 1840, the “penny black” stamp, issued in Britain went into circulation as the first prepaid stamp in history. It was an immediate success and was later adopted for use across the world.
Have a great week and stay safe,
Jason & Gina
