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The prompt action from governments and central banks to provide large scale fiscal and monetary support and the decline in coronavirus case numbers in many major economies assisted a global equity market rebound in April. The MSCI World index was up 9.07% in Sterling terms over the month, paring losses in the year-to-date to -8.03%.

Boris Johnson outlined a cautious approach for the UK’s exit from lockdown on Sunday 10th May, which is highly contingent on coronavirus case numbers.  Estimates for UK GDP growth in the second quarter are sobering, with the Bank of England stating it could fall by 25% in the second quarter and by 14% for 2020 as a whole. On the positive side, the Banks’s Governor, Andrew Bailey, also stated growth could rapidly recover next year, with Britain recovering faster than it did from the 2008 global financial crisis, provided there was no further outbreak of coronavirus. In such a scenario, UK economic growth could be 15% for 2021 as a whole, with GDP recovering its pre-crisis peak by the second half of next year. So now we must be patient and wait and see how quickly economic activity picks up as the lockdown eases and keep a close eye on case numbers.

We are mindful that equity markets are likely to remain volatile through 2020 as the global economic impact of the coronavirus becomes clearer. There will also be “bumps in the road” for instance there are  reports of localised infection hotspots in South Korea and China and the estimated virus reproduction rate in Germany is back above 1 (the critical number at which containment measures tend to be reconsidered). However, lockdowns are easing globally, with much of Asia back to work, Australia setting out a 3-point plan to end lockdown by July, European countries in the first stages of easing lockdown and more than half of the States which make up the USA now beginning to exit lockdown and boost production.

Political pressures within the Eurozone are rising, driven by the ramifications of large scale lockdowns on individual countries. Italy has been hit particularly hard both in terms of coronavirus case numbers and economically. Italy’s debt to GDP ratio was already high before the crisis at 136% of GDP. The need to raise borrowing to support the economy through the aftermath of lockdown could lead to unsustainable debt levels, and even the risk of sovereign debt default. The crisis has once again sparked friction between individual countries’ national interests and that of the EU and Eurozone as a whole. Last week the highest German constitutional court ruled that the ECB had exceeded its authority in its latest round of quantitative easing  and, while stopping short of declaring the measure illegal, it has effectively said the ECB may buy no more German government bonds until a review of the wider impact of the policy has taken place. The ECB has responded robustly stating that such a move would allow national governments to influence the Bank’s policy and compromise independence. Further trouble may therefore lie ahead for the Eurozone Bloc and there may be some populist political pressure for particular countries to exit the EU, which has already survived the Greek debt crisis between 2009 and 2016.  We are monitoring the situation and the exposure within our portfolios to Europe. It is, however, important to keep in mind that despite macroeconomic and monetary pressures, there are some resilient companies headquartered in Europe, which make their money through international sales as well as through sales within the Eurozone region and which can therefore weather political pressures. The fund we have selected for our model portfolios is actively managed, with a focus on large, high quality companies with sturdy financials. There is currently a 25% allocation to healthcare companies within the portfolio and only 6% exposure to Italy.

Our overall strategy continues to be to avoid “knee-jerk” reactions and to keep our model portfolios well diversified between asset classes and geographies. The Investment Committee is in the process of reviewing our asset allocation and fund selections and we will keep you updated as our thinking progresses.

This article is for information purposes only. It does not constitute investment advice and is not a recommendation to invest. The value of investments and the income from them may go down as well as up and you may not get back your original investment.  Past performance is not a guide to the future.

Date of publication: 12 May 2020

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