Market Update

The past week has been incredibly turbulent for global equity markets. Initially, there was a sharp rise in equities; for instance, the S&P 500 index surged by 4.60% on Monday (March 2, 2020) and 4.22% on Wednesday (March 4, 2020). However, most of these gains were wiped out, and then some, as the number of coronavirus cases continued to rise worldwide.
In response to the situation, the Federal Reserve made a significant move by cutting US interest rates by 0.5%. This action has put pressure on other major central banks to follow suit, which is viewed positively. A collective global easing can help alleviate the economic repercussions of the coronavirus outbreak by easing the financial burden on households and companies.
It's highly probable that these interest rate cuts won't be isolated incidents. In fact, it would be surprising if the Fed doesn't implement further rate cuts at their upcoming meeting on March 18, 2020. Similarly, the Bank of England might reduce UK interest rates by 0.25% or even 0.5% at their meeting on March 26, 2020, if not sooner.
While it might be premature to predict a complete short-term recovery for equity markets, especially as consumer confidence globally has been shaken due to the coronavirus outbreak (resulting in severe impacts on sectors like travel and airlines), there is some comfort in the slowing rate of new infections in China. This slowdown could potentially quell uncertainties, allowing equity markets to look past the immediate threat of a coronavirus-induced recession and focus on a potential economic recovery in Q3 or Q4 of 2020.
Therefore, we reiterate our previous statements: though we maintain a positive outlook on equities in the long run, particularly in Asia and Emerging Markets, given the rising global infections, there is a strong likelihood that short-term equity market volatility will persist. Consequently, we are adopting a cautious stance, keeping a slightly higher level of cash (including liquidity funds) in the short term.
Moreover, in our discretionary portfolios, where clients have notable exposure to companies with pronounced coronavirus risks, we have made adjustments. For instance, we have reduced holdings in companies like Melrose Industries (due to its automotive and aerospace exposure) and Compass (contract catering services). Additionally, we have sold Carnival (travel) and Burberry (luxury goods) due to the expected impact of reduced consumer and tourist spending. We have also utilized this market weakness as an opportunity to invest in companies where share prices have dipped over the past few weeks, such as National Grid, London Stock Exchange, Flutter, and Unilever.
On another note, the price of a barrel of Brent oil fell by nearly 10% on Friday, March 6, 2020, after talks between OPEC and Russia to cut output collapsed. This situation opens the possibility of a repeat of the 1980s scenario when oil prices plummeted. Notably, a lower oil price doesn't only translate to cheaper petrol at the pump; it also significantly affects the cost of producing various everyday products, including plastics, household items, clothes, and energy-intensive items like food and metals. This decline essentially acts as a substantial tax cut for all consumers and countries importing significant amounts of crude oil, such as Japan, China, and India. Furthermore, the lower oil price is expected to dampen inflation even further, considering its impact on a wide array of goods and services, which is already below the targets of most global central banks.
Most of the economic data released this week pertained to a time when the coronavirus was primarily a Chinese problem, not yet a global one. For instance, the UK PMI reading for February, though slightly lower at 53.0 compared to January's 53.3 due to delays from Asian companies, was still stronger than in 2019. Similarly, the Beige Book in the US indicated a modest to moderate rate of economic expansion until February 24, 2020, while acknowledging that the coronavirus outbreak was beginning to affect travel, tourism, and might cause some supply chain disruptions. US employment also showed robust gains, with non-farm payrolls rising by 273,000 in February, reducing the unemployment rate to 3.5%. However, these figures reflect a period before the full impact of the coronavirus outbreak.
Looking ahead to the coming week, there are several significant events on the horizon. These include an ECB monetary policy meeting, UK industrial production and monthly GDP, US Consumer Price Index (CPI), and Chinese CPI and import/export data. Additionally, Rishi Sunak, the new Chancellor, will present the Budget Statement on Wednesday, March 11, 2020.
We're also approaching the end of the tax year, so we'd like to remind you that if you haven't utilized your ISA allowance yet, now is the time to do so. The current limit is £20,000, and if you don't use it by April 5, 2020, you'll lose it. Please contact us using the details provided in your email to initiate the process.