The bestial behaviour of markets in mid-March has given way to something rather calmer in recent weeks.
Clearly the virus has wrought significant damage on economies around the world, while the political and medical response has been mixed. In short order, we entered the most dramatic economic downturn since the War for clear and obvious reasons that are loudly trumpeted by the media. We are not yet in a position to know whether a breakthrough vaccine or treatment is likely soon, though there would appear to be a few hopeful signs.
The various lock-down, testing and tracking measures that have been adopted appear to be having the desired effect, though with notable, tragic, exceptions such as Brazil. We have no way of knowing whether a ‘second wave’ is likely, though we are sure that the BBC will be watching for any indication of it like a hawk, and do feel that we must, by now, be better prepared. On the whole, the equity and other ‘risk’ markets are looking on the bright side and this is causing considerable consternation. Our suspicion is that with cash yields at zero, longer-dated yields exceptionally low and central banks firmly supporting credit markets, the background becomes rather more favourable for equity investors.
American stocks led the way over the past four weeks, up around 5% on the S&P 500, London lagged as did Europe (up around 2%). Japanese stocks remained bright through the period, up nearly 6% overall. After the powerful rally in the leading tech names over the past two months, there are now some tentative signs emerging of a switch to (or simply recovery in) the ‘value’ sectors such as financials, oils and consumer discretionary. We are also seeing a resurgence in share placings such as the £2 billion offering from Compass Group as we write.
It would still appear to be silly season in the oil markets where the price of Brent crude jumped around 70% to prices around $35 per barrel again, responding to the better tone in markets and reports that Saudi Arabia is now cutting production. Property (real estate if you prefer) stocks took a knock after Land Securities full-year figures alarmed the market with a halving of the dividend and poor rent collection figures. The stock price re-visited the early-April lows before a modest recovery, taking most other property stocks down with them, this looks extreme and value can be found in the area, we suspect that talk of the demise of the office as a workplace is rather overdone.
10-year sovereign bond yields edged lower in the UK but slightly higher in the US - most European sovereign bond yields are negative out to five years. Meanwhile, credit spreads held the rally of the previous month while issuance remained strong, another area where value can be found.
Meanwhile, Federal Reserve Governor Powell warned about the risks to asset prices from a prolonged downturn, stressing, we noted, the risk to commercial property prices (not aimed at the President of course). Along with other central banks, he is emphasising that he has more tools in his box but that really important matter is for governments to take-up the running. In this vein, the Franco-German recovery fund proposal to offer grants to sectors and regions most affected by the pandemic is an encouraging step - one that was a while coming.