Market Commentary - Apr 3rd 2020
No clear end in sight has emerged for investors in what has been a week of continued uncertainty and volatility with respect to expectations for both economic activity and financial markets. Despite heightened intra-day volatility, markets have exhibited a relative stability over the week as a whole; the S&P 500 is 0.6% lower to Thursday’s close and the FTSE 100 is down by around 1.9% to the time of writing. In addition to the ongoing economic shutdown and subsequent ramifications, markets have had to factor in unprecedented conditions within energy markets, which have affected equity and credit markets significantly.
Although guidance pertaining to the duration of economic shutdown is still unknown, the reported new virus cases have shown signs of abatement within regions such as Italy and Spain. China appears to be gradually returning to a relative state of normality; sentiment backed by IHS survey data suggests a rise in manufacturing activity in March, notwithstanding reports in the latter half of the week of a possible second forced isolation in some areas. The Chinese equity market has fared relatively well, down around 10% in the year to date.
America now appears to be taking a lot of investor attention, with a somewhat disparate approach to controlling the outbreak of Covid-19 by President Trump and others in charge, potentially posing difficulties when aiming to achieve a cohesive and effective national response. In terms of a monetary relief strategy, the response has been better, with a swift, sweeping and powerful combination of both monetary and fiscal stimulus deployed with little hesitation. This week the Federal Reserve has continued to ensure support for global financial markets, providing liquidity and stability through increased international dollar repurchase agreements and increased permitted leverage for banks and lending institutions. Economic data has begun to display the harsh reality caused by recent events. 10 million US workers have filed for unemployment benefits within the last two weeks, a figure far exceeding any previous short-term economic shock.
Economic indicators such as the Texas Manufacturing activity index, the Bloomberg Consumer Comfort index and New York ISM Current Conditions index have all exhibited unprecedented levels of change.
This week brought the first quarter to a close; the worst first quarter on record. As more is known about the financial impact of country-wide shutdowns, economists and company analysts will be providing revisions to their forecasts. The ability of companies to deal with falling revenues and challenging demand conditions will be important. Our investment process favours funds investing in companies with quality and robust business models, low debt levels and strong management teams. Such characteristics will be critical in successfully navigating the difficult times ahead. Having raised cash balances will also help us take advantage of future opportunities that are bound to present themselves.
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