Market Commentary - May 7th 2020
“While many standard economic statistics have yet to catch up with the reality we are experiencing, it is clear that the effects on the economy are severe.” Jerome Powell’s comment from the Federal Reserve’s recent meeting emphasise current feelings of uncertainty. Governments are faced with the difficult task of trying to persuade individuals about a gradual reopening of economies, having only just convinced them to respect strict lockdowns.
Equity market performance in April provided investors with a conundrum. The distance between economic data and stock market performance has widened to unprecedented levels. The MSCI World gained 10.6%, rallying 27.4% from the low seen in March, yet this strong performance hides some very weak macroeconomic data. US GDP for the first quarter of the year fell 4.8%, initial jobless claims rose to 20 million and industrial production levels fell in the US, Europe and China. Perhaps, therefore, the rebound has been due to expectations; of hopes for ‘normalisation’, a relaxation of restrictions and also expectations that growth may be supported by the extraordinary level of monetary and fiscal policy easing that has been rapidly implemented across the world.
We are in uncharted territory with regard to these policies, and their implementation makes us question the consequences. The debate of inflation versus deflation is raised frequently in light of the enormity of central bank response. Consensus appears to find inflation an unlikely near-term risk; interest rates are expected to be lower for longer, yet the picture for inflation is far from straightforward.
Over a longer horizon, the argument for inflation, and how this period may differ from other economic corrections, can be explored in a few key points. Supply chain disruption and deglobalisation could lead to a ‘localising’ of corporate networks that will likely prove more expensive. Governments’ focus on avoidance of austerity measures (for the time being), combined with stimulus packages aimed directly at the consumer’s pocket leaves money available to be spent. The hoarding mentality we have seen during the lockdown speaks of behaviour commonly experienced during inflationary periods.
That being said; inflation was anticipated in the aftermath of the Great Financial Crisis, and it never materialised. We have exposure to index-linked gilts within our fixed interest allocation, however bonds overall remain expensive and we did not increase our fixed interest weight in April’s Asset Allocation meeting. We have additional inflation protection through our gold holding, which sits at a 5% weighting in each model. Gold has garnered much attention during the COVID-19 crisis; the commodity is making new highs in all major currencies bar the US dollar. Performance has not been consistent, however, as gold took a leg down in March as real interest rates rose, but quickly rebounded as vast amounts of stimulus came through the system from central banks.
Turning to other asset classes, from a performance perspective, US investment-grade corporate bonds led the way during the month. US equities came in second with the trade-weighted US dollar in third. Sector leadership has not changed in the way that many might presume given such a market correction; it has played even further into the hands of the already-dominant segments of the market.
We continue to monitor markets with patience and prudence whilst observing the trends spawning from the crisis, alongside those already established trends that are accelerating.
James Hambro & Partners LLP is a Limited Liability Partnership incorporated in England and Wales under the Limited Liability Partnerships Act 2000 under Partnership No: OC350134. James Hambro & Partners LLP is authorised & regulated by the Financial Conduct Authority. Registered office: 45 Pall Mall, London, SW1Y 5JG. A full list of partners is available at the Partnership’s Registered Office.
Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made or given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions (but so that nothing in this paragraph shall exclude liability for any representation or warranty made fraudulently). The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is not a reliable indicator of future results. Tax benefits may vary as a result of statutory changes and their value will depend on individual circumstances.