Investment market update: March 2020
It probably comes as no surprise that much of the market update for March will be linked to the coronavirus pandemic. What started as a virus in Wuhan, China, has quickly become a global issue that’s affecting millions of people worldwide and implications for stock markets.
As governments around the world impose measures to try and halt the spread of the virus, economies have ground to a halt. Previously the International Monetary Fund (IMF) predicted the global economy would rise by 3.3% this year. However, it’s since warned that the forecast has been torn up as Covid-19 impacts both supply and demand. It’s now expected global growth will dip below last year’s (2.9%), but it difficult to predict by how much given the current uncertainty.
Few industries have been left untouched by the pandemic, leading to fears that a global recession is just around the corner. With travel nationally and internationally facing restrictions, the airline and travel industry have been one of the most severely affected. IATA, which represents the airline industry, said the pandemic is set to cost the industry at least $63 billion. In recent weeks, airlines have been forced to ground flights and, in some cases, entire fleets.
Usually, the Budget taking place would be headline news. But the 2020 Budget, taking place on 12th March, has been overshadowed by the impact of the coronavirus and lockdown. However, the Budget was used to announce some of the early measures taken to stimulate the economy during uncertainty, including offering ‘business interruption’ loans and cash grants to small firms.
Just before the Budget, the Bank of England also announced a cut to its base interest rate, quickly followed by another cut just a week later. The base rate is now just 0.1%, a historic low.
The current circumstances have been likened to a ‘wartime situation’ with a stimulus package worth £20 billion to support businesses through the worst of the crisis. However, the FTSE continued to experience volatility. In fact, the FTSE 100 ended quarter one 24.8% down, the worst quarter since 1987.
However, even before the coronavirus was taking hold, figures suggest that the UK economy was flatlining. The Office for National Statistics (ONS) figures show that GDP was flat in January and weaker than expected. On top of this in the three months to January, the service sector was flat, and production contracted by 1%. Whilst construction grew by 1.4%, this only represents a small part of the economy.
The Purchasing Managers’ Index (PMI) demonstrates the impact the pandemic is already having, with figures below 50 showing contraction:
Overall, the PMI shows an extremely sharp fall in activity, falling from 53 to 37.1. It marks the worst reading since the survey began in 1990
The service sectors slumped to 35.7 from 53.2 in February
Manufacturing registered a small fall from 51.7 to 48, however, the PMI calculation assumes long delays for supplies are a sign of a strong economy, so the situation is likely to be worse than the figures indicate
So, where does this leave the UK? Predictions suggest that a recession is becoming more likely. Capital Economics predicted UK GDP could fall by 15% in the next quarter. This compares to the 6% decrease seen during the 2008 financial crisis.
A YouGov poll suggests that Brits aren’t optimistic about economic prospects either. More than half (52%) expect a recession within the next year. Some 19% expect a depression, typically associated with slumped output, extremely high unemployment and widespread company closures.
Europe is in a similar position to the UK; governments are taking measures to support individuals and businesses throughout the pandemic, stock markets are experiencing volatility and there are fears that the crisis will trigger a recession.
In response to the economic shocks, the European Union suspended debt borrowing limits. Christine Lagarde, President of the European Central Bank (ECB), also pledged there were ‘no limits’ on the actions the ECB would take with quantitative easing used in a bid to sustain the eurozone economy.
The PMI for the eurozone reached a record low of 31.4, with services and manufacturing falling to 28.4 and 39.5 respectively.
In response to Covid-19, the Business Roundtable, which speaks for dozens of America’s biggest companies, including JP Morgan Chase, Apple and General Motors, called for bold action to limit the economic fallout.
The White House has proposed a roughly $850 billion emergency economy rescue package to support businesses and taxpayers. The Federal Reserve also made an emergency rate cut, with a target range of 0% to 0.25%. The combination did help to ease markets, but investors still experienced significant volatility.
The latest figures for job growth in the US painted a positive picture for January and February. But this was before the impact of coronavirus was felt, with unemployment figures rising throughout March. In New York alone, there was a 1,000% increase in unemployment claims. Capital Economics predicts the country is heading for a 10% unemployment rate, more than double the rate seen at the end of 2019.
Risk of a recession is also being felt in the US. Bloomberg’s News’ Recession Tracker calculates the probability of a recession is over 50%.
This all had an impact on the markets. Wall Street suffered its worst day since 1987 on the 16th March. US 10-year treasury bonds, the benchmark for global demand of bond, plumbed to new depths, far beyond those of the financial crisis, indicating global investors are looking for ‘safety’.
As the original epicentre for the outbreak, it’s not surprising that China has reported a huge tumble in factory sales for the first two months of the year. The country saw factory sales fall by 38.3% year-on-year. Highlighting the impact of the pandemic on both supply and demand, new car sales in China also fell by 80% in February year-on-year.
Whilst the current stock market volatility and economic uncertainty may be a cause of concern among investors, it’s important to keep a long-term view and your goals in mind. If you’d like to discuss your portfolio, please get in touch.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.