By: Graham Wainer
Headline equity market returns since the end of March paint a ‘crisis averted’ picture of the COVID-19 pandemic.
Having suffered one of the sharpest declines on record, falling c. 35% in about a month, the broad stock market has staged an equally eye-catching recovery.
The economic contraction experienced in the second quarter is likely to prove to be the deepest since the Great Depression of the 1930s. As the US unemployment rate spiked to 14.7% in April, few would have expected such a resilient market reaction.
Market sectors are reflecting different, yet rational, levels of COVID-19 disruption. The overall market has benefited from strong returns in technology and healthcare stocks, while ‘real economy’ stocks (industrials, financials, energy, retail) have struggled to sustain a recovery from their (deeper) lows.
Vast fiscal and monetary stimulus has been a formidable tailwind for risk-assets. It is estimated that c. 5% of global GDP has been injected into the financial system through central bank balance sheet expansion. Investors have been reassured that a 1930s-style deep and long-lasting depression is unlikely.
After such a strong market recovery in the second quarter, a second wave of virus infections could be the trigger for renewed volatility. We certainly do not rule this out. However, we believe there is good reason to consider another disorderly market reaction to be unlikely.
Like in 2008, a global crisis coincides with a US Presidential election this year. President Trump’s approval rating has fallen sharply and a change in leadership is not unlikely. As the campaign heats up, we expect higher volatility in both voting intentions and capital markets.
We continue to ‘tune’ positions rather than ‘time’ the market. Looking forward, we expect a bumpier path for risk-assets – higher volatility and a more gradual recovery, rather than an uninterrupted upward trajectory. We are reflecting this outlook in our portfolios in the following ways:
- Emphasising quality, adaptability and sustainability
- Maintaining high levels of liquidity and diversifying assets
- Avoiding investments reliant on leverage and strong economic recover
While portfolio values have recovered meaningfully over the past three months, and market disorder has transitioned to a perceived calm, we are more vigilant than ever. We continue to monitor developments closely and scrutinise our underlying allocations with rigour.
Read more articles by Graham
Find out more about Stonehage Fleming's Investment Management offering
Disclaimer: This article has been prepared for information only. The opinions and views expressed on any third party are for information purposes only, and are subject to change without notice. It is not intended as promotional material, an offer to sell nor a solicitation to buy investments or services. We do not intend for this information to constitute advice and it should not be relied on as such to enter into a transaction or for any investment decision. Whilst every effort is made to ensure that the information provided is accurate and up to date, some of the information may be rendered inaccurate in the future due to any changes. © Copyright Stonehage Fleming Investment Management 2020. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission.