Review of the Week: A long shadow

As markets take a respite from their worst week of selling since the dark days of the Lehman’s collapse, our chief investment officer Julian Chillingworth considers the longer-term implications for investors, and also looks at the narrowing Democratic primary race to take on Donald Trump.

The ever-lengthening shadow of the Coronavirus darkened markets last week and we saw the biggest falls since the days of the Lehman’s crisis, with equity indices across the world down between 6% and 12%. The catalyst for this decline was the rise in cases outside China and subsequent concerns about quarantine measures; economic activity will be severely impacted if huge swaths of the population are forced to stay at home.

Over the weekend, those economic implications became apparent with Chinese manufacturing PMI coming in at 35.7 which was far worse than expected. Analysts are revising down global growth and slashing earnings numbers in the US and Europe.

The virus has now reached 68 countries and the global death toll has surpassed 3,000, with almost 90,000 cases diagnosed. Donald Trump tried to reassure the American public that the authorities were on top of the situation, but investors are likely to remain skeptical with health experts warning that numbers could continue to increase. We’ll likely see further disruption to supply lines and demand, leading to subsequent profit warnings. There are some beneficiaries, though. Netflix for example has gotten a boost from more people being confined to their homes.

There have been four previous 10% falls in the S&P Index in a week since the Second World War: October 1987, April 2000 (TMT crash), September 2001 (9/11) and October 2008 the Lehman's bust. In all cases, the authorities announced major monetary and fiscal stimulus packages, a reaction we’re seeing this time round too.

Markets were attempting to rally Monday morning as investors hoped for a rate cut from the US Federal Reserve on 18 March, while the Governor of the Bank of Japan (BoJ) announced that the central bank would supply liquidity to markets and ensure stability to markets through asset purchases. The Chinese government has already started its own stimulus operation and Hong Kong has engaged in helicopter money for its citizens.

We think it’s unlikely there will be a sharp ‘V-shaped’ recovery in the global economy or markets, but a more gradual ‘U-shaped’ one is a distinct possibility, and stimulus efforts will help in this regard. As bond yields and cash rates move significantly down from already historically low levels, this has the effect of reducing even further the prospect of future returns from these assets. When markets eventually stabilise and postponed spending and economic activity is unleashed, this is likely to increase demand for the higher returns that equities offer over less risky assets.

Meanwhile we’ll do our best to keep a steady hand on the tiller and avoid selling amid short-term turbulence. But the coronavirus episode will damage global growth over the next few quarters, and the continued deceleration of global activity together with the attendant risks of a more severe scenario suggest a bias toward defensive areas within equities, with good quality earnings that are less vulnerable to the economic cycle, continues to make sense.

Index

1 week

3 months

6 months

1 year

FTSE All-Share

-10.8%

-9.8%

-4.3%

-1.4%

FTSE 100

-10.8%

-10.5%

-5.8%

-2.7%

FTSE 250

-11.2%

-7.7%

1.9%

3.8%

FTSE SmallCap

-10.2%

-3.6%

2.0%

2.7%

S&P 500

-10.2%

-5.2%

-1.5%

12.0%

Euro Stoxx

-9.6%

-7.7%

-4.2%

4.6%

Topix

-5.1%

-9.1%

-3.6%

3.6%

Shanghai SE

-3.2%

1.3%

-2.4%

-2.5%

FTSE Emerging

-5.6%

-2.9%

0.1%

4.2%

Source: FE Analytics, data sterling total return to 28 February

The race narrows

The race to take on Donald Trump has narrowed after Pete Buttigieg and Tom Steyer withdrew their candidacies on the back of disappointing results at the South Carolina Democratic primary.

Former Vice President Joe Biden won almost 50% of the vote - a decisive victory which has lifted the former vice-president’s campaign. Senator Bernie Sanders was a distant second place, winning just under 20%. Results suggest Mr Sanders is struggling to win support from African American voters, as he did in his failed 2016 bid for the democratic nomination.

This week brings Super Tuesday, the day a large number of states will hold their primaries, including California and Texas, which have some of the largest numbers of delegates up for grabs. By Wednesday morning we should have greater clarity on nominee viability. The average of the most recent nationwide polls, according to Real Clear Politics, puts Senator Sanders on top with about 30% followed by Mr Biden at around 20% and former New York City Mayor Michael Bloomberg at 16%.

Markets will face challenge should Sanders surge towards the Democratic nomination. If the Trump Administration handles the coronavirus outbreak poorly and the economy and markets don’t rally sharply, could we see a radically leftward shift in the White House? Betting markets have taken the view that a self-described ‘democratic socialist’ will prove unelectable and Biden is the clear favourite versus Trump in state polls.

Bonds
UK 10-Year yield @ 0.39%
US 10-Year yield @ 1.10%
Germany 10-Year yield @ -0.63%
Italy 10-Year yield @ 1.13%
Spain 10-Year yield @ 0.25%

Economic data and companies reporting for week commencing 2 March

Monday 2 March

Global manufacturing PMIs (Feb)
UK: M4 money supply (Jan)
Full-year results: Hiscox Ltd, Senior

Tuesday 3 March

EU: Eurozone preliminary CPI (Feb), unemployment (Jan)
Full-year results: GoCo Group, Aggreko, IWG, Signature Aviation, Greggs, Keller Group, 4imprint Group, Travis Perkins, Robert Walters, XP Power Ltd, Intertek Group, Fresnillo, Apax Global Alpha, John Laing Group, Rotork, Direct Line Insurance Group
Quarterly results: Ashtead Group
Preliminary results: Huntsworth, Ibstock

Wednesday 4 March

Global services and composite PMIs (Feb)
US: ADP employment (Feb)
EU: Eurozone retail sales (Jan)
Full-year results: Elementis, Devro, Hill & Smith Holdings, Legal & General Group, Polymetal International, Hostelworld Group, Vivo Energy
Preliminary results: TT Electronics, BATM Advanced Communications Ltd

Thursday 5 March

US: Bloomberg consumer confidence (Feb), factory orders (Jan), weekly jobless claims
Full-year results: ITV, CLS Holdings, Capita, Capital & Regional, Aviva, Schroders, Tyman, Headlam Group, Spirent Communications, Coats Group Intu Properties, Domino’s Pizza Group, GVC Holdings, Page Group, Melrose Industries, Premier Oil, Spire Healthcare Group, Admiral Group
Quarterly results: Kier Group
Preliminary results: Synthomer

 

Friday 6 March

US: Non-farm payrolls and unemployment (Feb), trade balance (Jan), wholesale inventories (Jan, final)
EU: German factory orders (Jan), Italian retail sales (Jan)

Total votes: 29

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