The past couple of weeks have seen investment markets edge forward and as we speak are looking significantly healthier than they did a month ago. However, the ‘recovery’ such as it is, can only be described as a tentative one. It has been greatly assisted by the market supports provided by central banks and by their stated willingness to provide further supports should they be needed. The market bulls have clearly formed the view that we have seen the worst as far as the stock markets are concerned and that we are already in full recovery phase. On the other hand, focusing simply on the economic picture, it is difficult to escape the conclusion that we are still very much in the dark insofar as the economic effects are concerned. The impact of the virus has been to hit the off switch on the world economy, an event which has no comparables in modern times – the Second World War and the Great Depression are probably the closest to be found and these events happened at times when global trade in goods and services was a tiny fraction of what it is today.
On the positive side, we are beginning to see moves in a number of European countries towards relaxing restrictions, notably in Austria, Denmark and the Czech Republic. While this is to be welcomed, it is clear that these changes are going to be very gradual indeed. And the big question is how quickly will economies respond as the restrictions are removed. The big unknown here is the behavior of people, for example:
- Will people be slow to get back on to planes?
- Will people be reluctant to go to crowded restaurants and bars?
- How soon will people be willing to use crowded public transport?
- Will fans be happy to attend sporting events?
These factors and more will be the determinants of just how long and deep the recessionary effects will be, locally and around the world.
In terms of the markets, we continue to sense that a repeat of the March correction is more likely than not over the coming weeks and that it is certainly not time yet to make an unbridled commitment to markets. Rather a planned phased approach carried out in the context of your overall portfolio is to be advised. The table below shows key equity market performances year to date expressed in euros. Currencies have played a significant role in these performances when euro-based, in particular the strengthening of the dollar since the beginning of the year.
Market Perf. YTD (euro terms)
*Source: Financial Times, Financial Express
Having fallen in price along with all risk assets in March, Gold has staged a decent recovery since then and is up by some 15% year to date. In our view, the gold price will go further should stock markets deliver further volatility over the near term. Oil has also bounced off its lows following the announcement of production cuts by Saudi Arabia and Russia. However, the demand picture for oil is so poor currently that further bouts of price weakness over the coming months are certainly not ruled out.
Positioning for Recovery
Clients looking to position themselves for further upward moves in markets are still best advised to follow a phased approach in order to manage the risk of further volatility. The picture discussed above suggests that the economic recovery will not be rapid and will be more gradual in nature, pushing well into 2021. Stock markets as usual will anticipate events but it could be some time yet before there is sufficient clarity around corporate earnings prospects and general economic activity to allow a sustained pickup in investment markets.
Author: Terry Devitt – Investment Director
Market Update by Terry Devitt
This marketing material has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and;or capacity for loss of any particular person. It should not be relied upon to make investment decisions.
Warning: Such forecasts are not a reliable indicator of future performance.