Market Update – 12 May 2020

Well this last weekend I had a great conversation with my mum, who continues to be a source of inspiration despite being shielded.

We were discussing the VE Day anniversary and the muted celebrations of the event and she set a context that although the actual VE Day celebrations were reported rightly as lively, that post these, life was muted for everyone.

Post WWII Great Britain faced huge social, economic and housing challenges and in the aftermath of the terrible conflict the country changed dramatically.

Prime Minister Churchill was voted out of office by the British public and Clement Attlee became Prime Minister, this might seem harsh with Churchill having just overseen the winning of the war but the reality is the labour leader had been running home affairs throughout the campaign as part of the coalition government while Churchill focused on the war effort.

After the end of the war, the coalition government was dissolved and Attlee led Labour to a landslide victory. Attlee inherited a country close to bankruptcy and beset by food, housing and resource shortages. His government introduced amongst many others things the National Insurance Act 1946 and National Assistances Act – social security as we now know it – and the foundation of the National Health Service (1948), the enlargement of public subsidies for council house building as well as reforming trade unions as he set about rebuilding Britain.

It was dramatic social change the like of which had never really been seen before.

At this time Britain needs rebuilding again, this time round it’s not buildings and homes that are required on mass but a way of life that needs to be rebuilt, the social and economic challenges ahead are considerable and once more the country needs to change dramatically.

The Keynesian approach adopted after WWII is unlikely to be adopted this time round but there are lessons that can be learned to ensure that the changes required in order to both stimulate the economy and society are made.

If dramatic change is required, you could be forgiven for wondering why the global markets are showing positively and going against convention?
Well firstly we’ve got to caveat this with, just now. The markets are going against convention but with good reason.

The global economy GDP is dominated by the USA (23.6%) and China, (14.3%) with the next 4 countries (Japan, India, Germany and United Kingdom) accounting for approximately (14%) GDP – source IMF World Economic Database 2019.

And we are beginning to see the green shoots of recovery.

USA

The worlds largest economy, the USA, has had a $3 trillion stimulus package introduced as the Federal look to reboot the economy. The US market has reacted positively and is already anticipating a sharp but short recession as it looks at the tentative signs the outbreak has peaked.

Why, well technology stocks are smashing it!

Tech giants Amazon, Apple, Google-parent Alphabet, Microsoft and Facebook have been on a serious charge forward for years and are behind a big chunk of recent gains. Microsoft shares have jumped 17 percent and Amazon has soared 28 percent since the start of the year.  The five stocks comprise 21 percent of the S&P 500 and have helped lift the Nasdaq composite into positive territory in 2020 even as the pandemic has devastated the economy.

These are the stocks that have empowered the US economy and have been the job-creation engines and they are enabling people to work at home. Investors realise the value they provide and they … believe they will continue to be successful. Like it or not, Facebook keeps people who are isolated from being alone.

There’s hope on the health front.

Despite the pandemic’s terrible toll, the global pharmaceutical industry has massed its resources to laser focus on finding vaccines and treatments.  Positive data is being reported and the market is expecting that the global health situation is going to get better as it has in China and in Italy. It is extrapolating from those countries’ experience.

Oil markets are calming down and prices are rising.

U.S. oil prices are back near $25 per barrel and Brent crude, the international benchmark, is up near $30. Though producers need $50 or so per barrel to make money, the current prices are far better than they were just weeks ago, when holders of U.S. crude were paying people to take oil off their hands

But the test will be whether the consumer — long the main engine of the U.S. economy — springs back to life after being virtually, or even literally, shut in during the pandemic.

China

Last week a surprise recovery in Chinese exports propelled global stock markets higher. The world’s second-largest economy reported a 3.5% rise in shipments last month compared with a year earlier. It marked a rebound from March, when exports were down 6.6 per cent.
Beijing has lifted the lockdown and is pushing ahead getting industry up and running with the country’s central bank signalling at the weekend even more support for the economy and has lowered interest rates.

However this positivity was tempered yesterday with new COVID 19 cases reported in Wuhan the epicentre of the pandemic, it didn’t however stop Shanghai Disney which opened Monday, selling out in minutes. Although the park will admit only 30 percent of its capacity, people’s appetite to get out and spend money bodes well.

Japan

Tokyo stocks enjoyed a good day yesterday attracting significant purchases amid growing expectations that business activity choked off by the COVID 19 virus will eventually regain vigour in and outside Japan. Investors are increasingly looking toward a post-COVID 19 pandemic future, with over 30 U.S. states reopening and the Japanese government considering lifting the state of emergency in many of the 47 prefectures.

India

The Modi government’s decision to extend the lockdown until 17 May has put the economy on the path to a contraction, many economist have forecast.   The lockdown has brought manufacturing and services to a grinding halt, prompting many to predict that the Indian economy will either remain stagnant or may contract by more than 2% in 2020/21. Both these sectors contribute over 80% of India’s (GDP).

The growth forecasts for India have been revised downwards by around 2-3% points in the last one week after the government announced that the lockdown will extended beyond 3 May.

Germany

In Europe the powerhouse Germany saw industrial production fall by nearly 12 per cent in March, the largest single drop since the country was reunified in 1990, and a recent survey suggested that most companies believe that the worst is yet to come. However, several economic institutes believe that pent-up demand, high savings rates and unstinting stimulus from the state provide the foundation for a swifter recovery than elsewhere in Europe.

United Kingdom

Although any re-opening of the country is still weeks away, investors expect a resurgence as seen elsewhere. Of course it’s far too early to even consider this but as investors look ahead they expect our strong economy to recover, to adapt and grow.

Investors Globally are betting on how companies will be performing a month from now, six months from now, even a year. Stock prices are based on expectations. The current bad news was already baked in, as is more to come. But the longer-term hopes and expectations are for a reopening and corporate recovery.

The efficient market theory, as it is known to its adherents, holds to the belief that the market prices most stocks correctly.

The markets will adapt and evolve, economies have shrunk- no surprise- but will grow again.
Stay safe