In the first quarter the market fell sharply as economies round the world shrunk. China saw their GDP (a measure of the economic activity of a country) fall by almost 10%. That is like 1 in 10 of the whole workforce being unemployed in a quarter! Europe, the US, and the UK also fell but not as far.
Not surprisingly stock markets responded with big falls – in the UK, the FTSE All Share fell by more than 25%, while the FTSE All World fell by 16%. There were large falls in Europe and Emerging Markets fell by almost 20%.
In Q2 the equity markets rebounded strongly, driven by the expectation that government action (furlough schemes, tax cuts and cuts in interest rates) would feed through to a recovery.
The market rebound does mean that, in terms of value, markets are not cheap. However, the outlook has improved as enormous fiscal (tax cuts and furlough) and monetary (interest rate cuts) announcements have been announced.
The big question is whether the markets have gained too much and too soon?
There remain several risks to the markets. If a second wave appears and requires lockdowns, then this would have a negative impact on markets. On the positive side though, most health services appear to be in a better place to handle a second wave, in terms of capacity and knowledge. Positive news regarding a vaccine would of course give an upwards boost to equity markets.
In the US, the US Federal Reserve cut interest rates to zero and announced the most significant support package since the Second World War. However, the election of the President is not going how the markets had been expecting. A Biden win could have a significant downwards effect on the US equity market, as Mr Biden has indicated that he plans to reverse some or all of President Trump’s corporate tax cuts.
The UK also has the uncertainty to come of the Brexit negotiations, which will add extra volatility to the markets in the run up towards the year end. It is in both sides interest to do a deal but, as usual in dealings with the EU, any deal is likely to be a last minute one. But if there is a deal this could well be very positive for the UK equity market.
Some companies have reacted to this uncertainty by cutting their dividends, which is also negatively impacting the valuation of equities.
While it seems likely that hopefully the worst of the recession is over, global economic levels are still low. In addition, several industries will continue to be affected by the virus, particularly the leisure, travel, holiday, and pub / restaurant industries. Given the damage done, it seems that profit growth could be slower than many hope.
Although a lot of the bad news may already be expected by markets, uncertainty and market volatility will remain high.
To summarise the current environment is one of significant uncertainty:
- given the strong rise in markets which have occurred since the Q1 lows, there is potential for market falls, but
- Government support and the large amount of cash help by pension funds, and asset managers could drive markets higher.
The value of investments will fluctuate, which will cause values to fall as well as rise and investors may not get back the original amount invested.
Written by – David Norman (aka DAN), CEO of TCF Investments Limited
Whilst reasonable care has been taken in the preparation of this document, no reliance can be placed upon it and advisers should complete their own independent due diligence. MAPS accepts no liability for any inaccuracy or omission in this document. MAPS does not provide financial advice. Investors should seek independent financial advice from a professional if they are in any doubt about making an investment. Past performance is not a reliable indicator of future results. Issued by Multi-Asset Portfolio Solutions (“MAPS”). MAPS is a trading name of TCF Fund Managers LLP, authorised and regulated by the Financial Conduct Authority. Registered in England and Wales with company number OC305442. Registered office: 220 Vale Road, Tonbridge, Kent TN9 1SP.