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The UK has entered another 3-week period of “lockdown” to control the spread of the coronavirus and the United States also remains in the containment phase.  However, many European countries are slowly easing restrictions as virus case numbers have slowed and we are keeping a close eye on the impact on their economies as people slowly return to work and social activities.

The Bank of England (BoE) has added further measures to try to support the UK economy. At an emergency meeting on 19th March, interest rates were cut to 0.1%. Additionally, a further £200 billion in quantitative easing via government bond and non-financial corporate bond purchases was announced, taking the total to £645 billion. The BoE will also enlarge the term lending scheme for small and mid-sized companies to try to keep as many afloat as possible in these testing times. Another key issue in the coming months for the UK economy will be the level of mortgage and personal debt held by individuals, how quickly the UK gets back to work and whether these rate cuts feed through quickly enough to assist individuals who are struggling to pay mortgages and debts. The historically low interest rates also mean cash remains unattractive as a substitute for long term investments, especially with the 1-year CPI inflation rate of 0.93%, which would create negative returns on cash in inflation-adjusted terms.

China has reported that its first quarter GDP contracted by 6.8% in 2020 from a year ago indicating that the coronavirus outbreak seriously impacted the world’s second largest economy. Nearly all major industrial enterprises have resumed work, while the return-to-work rate for smaller businesses has topped 80%, according to official reports. However, business activity is still not back to normal, especially in the services industries, with the restaurant and retail sectors still quieter than usual as consumers come to terms with the threat posed by the virus and the effect of the slowdown on their wallets. Additionally, the spread of the virus overseas has led to a drop in demand for China’s exports and the full impact of COVID-19 on China’s economy will not become clear until further economic data is released. There is also some doubt regarding the veracity of China’s reporting on the number of COVID-19 cases and deaths, which could have political repercussions. Despite the turmoil, the CSI China 300 index has only lost -1.4% in the year to 22nd April in Sterling terms, whilst the loss in the same time period is -7% in local currency.

The coronavirus has forced nearly every major economy into a lockdown and brought travel to a standstill. These factors have weighed down on demand for oil. The US benchmark oil price, the WTI, went negative on 20th April because storage facilities are nearing capacity and demand for oil is historically low. The oil production sector within the US economy is now likely to face a slowdown as this supply glut will need to be reduced before further oil can be piped and delivered. The larger companies in the market have their own storage facilities, which have varying levels of capacity, but smaller operators will feel the crunch the most. The UK and European benchmark oil price, Brent crude is at a historic low of $15.99 as of 22nd April and analysts are considering the possibility that prices could go to zero with storage facilities nearing capacity. There is limited exposure to oil and gas production within our model portfolios.  

An estimated $1.1 trillion shifted out of global stock markets in March, indicating that some investors have chosen not to ride out the volatility and have instead exited the market, possibly crystallising losses. Timing markets is extremely difficult, often requiring luck rather than skill to return cash into investments successfully and in line with market sentiment, which can shift in the short-term with little warning. It is for this reason that we have remained invested.

Our Investment Committee is having virtual meetings on a regular basis. We want to make fact-based decisions and are carefully reviewing data pertaining to global containment efforts to control the spread of the virus, economic and market data. Lockdown has created pent-up demand and once measures begin to be eased, probably in phases, the economy and stock market performance ought to pick up, although this cannot be guaranteed. We do not want to miss out on potential upside and want to ensure that decisions are made in a measured way.  We are also mindful that there is the possibility that once lockdown measures ease, there could be a second wave if COVID-19 infections, possibly smaller in scale, but still carrying implications for the economy and the broad market. We are looking into ways to keep our portfolios as robust as possible in uncertain times and will keep you updated as our thinking progresses.   

Date of publication: 23 April 2020

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.

 

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