Weekly Market Update: Monetary Policy Struggles to Support Markets

Mon 23 Mar 2020

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Market Update

The market sell-off continued last week, despite government pledges of further fiscal support and central bank liquidity injections, as countries moved into lockdown and tightened border controls to contain the coronavirus outbreak. UK equities were down -3.2% with Housebuilders, Industrials and Energy companies experiencing the brunt of the sell-off. US equities were the hardest hit last week, down -9.7%, with the S&P 500 falling into bear market territory. Global and Emerging Market equities were down -6.7% and -4.2% while Japanese equities were up +6.0% in GBP terms as the Yen, a safe haven currency, strengthened against Sterling. Globally, the hardest hit sectors were the more cyclical sectors including Energy, Financials and IT, while Telecoms and Healthcare performed well over the week in Europe and the UK. Global yields remain low with the US 10Y and the UK 10Y yielding 0.85% and 0.56% respectively. Sterling has been vulnerable to declines in global stock markets, down -5.3% against the US Dollar and -1.6% vs the Euro last week. In US Dollar terms Gold gained +4.0% last week, while Oil continued to slip, down nearly 60% YTD.

CIO Analysis

We can now comfortably use a phrase that, under other circumstances, would surely risk bringing upon us financial anathema: “This time is different”. European and Chinese societies, as well as some American states, worried by the death toll in Italy, have weighed the cost of human lives against that of severe economic disruption and have, quickly or slowly, opted for life. What ensued, for the first time in over 100 years of financial history, is an economic and financial crisis not due to factors inherent in market boom and bust cycles, nor the functioning of business. Economically, we are staring at a quarterly GDP contraction of 10%-20% for many developed economies, unheard of since WWII, maybe with more to come.  This is more than twice the economic fallout of the 2008 GFC, which was spread out in 18 months.

How should we “invest in a time of cholera”? (sic)

For one, as this is not a traditional market crisis, investors must look outside markets for flags as to when the crisis will be over. From the quickest to the slowest, these are the three basic scenarios under which “social distancing” measures are lifted: (1) easy, available and cheap testing or if warmer conditions can slow infections to a pace acceptable for lifting some measures, (2) medicines already in circulation that can be used to create a solid cure protocol, enough to re-open most parts of the economy, (3) the invention and proliferation of a vaccine which will signal a proper return to business.

Two, in the meantime, we can no longer view stock and bond markets as properly functioning to raise and allocate capital. With over one billion people virtually in house arrest, including New York and London, it is difficult to consider market movements as “efficient”. Investment meetings are mostly taking place for maintenance and M&A activity is freezing, with long-term decisions delayed. Thus, we cannot look at traditional market metrics, such as valuations, to flag a possible recovery or take market movements hereafter too seriously.

Time is of the essence. For every day the economy remains in lockdown, the ensuing economic damage is disproportionate. Unemployment is set to rise and many small businesses will forever shut down, as there’s no amount of government aid that can make up for the sheer stoppage of cash flows. Urgency is the mother of invention, so we remain optimistic that a solution will be found. The speed at which this happened and the speed and unpredictable timing at which it may be reversed compel us not to change our positioning, but trust that time-tested asset allocation principles will get us through these, admittedly strange, times.  

David Baker, CIO