Market Commentary April 2020
Here is a summary of investment markets for the month of April 2020
Global share markets rise
Global share markets rose in April. Much of the gains were driven by encouraging developments on the coronavirus front, with a slowdown in the number of new cases in many countries fuelling speculation governments would soon begin to ease lockdown restrictions and reopen their economies. Investors were further encouraged by news toward the end of the month that an experimental drug being developed by a leading US biotech firm had proved effective in reducing the time it took for patients to recover from the virus. Stocks were also well supported by the US Federal Reserve’s commitment to use its full range of tools to counter the economic impact of the pandemic and news the US Senate had passed a further, sizable economic relief package. This followed the USD2.2 trillion relief package announced by the Trump Administration last month and will focus in part on supporting hospitals and providing additional virus testing. We also saw additional fiscal and monetary policy support in the UK, Japan and Europe. Sentiment was further buoyed by a stabilisation of sorts in oil prices and some encouraging US earnings updates. Although oil prices fell 8.0% in April, the decline was a far cry from the near 67% slump we saw in the first quarter, with prices supported by an agreement between OPEC and its oil producing allies to cut output by 9.7 million barrels a day – the largest production cut on record. Meanwhile, earnings results from the likes of Microsoft, Apple and Google parent, Alphabet, all beat analysts’ expectations. In saying that, there were some notable misses, including financial heavyweights JPMorgan Chase and Wells Fargo.
Limiting the gains were renewed US-China trade war fears after the former threatened Beijing with new tariffs in response to its handling of the coronavirus outbreak. Also weighing on sentiment was news the US economy shrank 4.8% year-on-year in the March quarter; an outcome that brought an end to the country’s longest ever economic expansion. In addition, we saw US unemployment spike to levels not seen since the Great Depression as well as steep declines in both consumer confidence and manufacturing activity. It was a similar theme elsewhere, with economic data in the UK, Japan and Europe largely underwhelming. Stocks were further impacted by news China’s economy contracted 6.8% in the 12 months ended 31 March; the first time the country’s economy had shrunk since the Cultural Revolution ended in 1976. However, whilst the result was disappointing, expectations are that China’s economy can recover quickly; a view supported by better-than-expected March manufacturing activity figures and a further normalisation in April’s data.
At the country level, US stocks re-entered a bull market in April after the benchmark S&P 500 Index climbed more than 20% from its 23 March low; though the index still closed the month 14% below the record high it hit in February. Share markets were also stronger in Japan, China, Europe and the UK.
Australian shares made strong gains in April. Like its global counterparts, the local market benefited from hopes the Federal Government would soon reopen the economy following a slowdown in the number of new domestic coronavirus cases. Stocks also benefited from good gains across the major miners and a series of positive economic data, including surprisingly strong first-quarter headline inflation and a surge in March retail sales. Limiting the advance were mixed performances across the ‘Big Four’ banks, a series of mixed domestic earnings results and renewed US-China trade frictions. Sentiment was further impacted by softer Chinese growth and some sobering comments on the local economy from Reserve Bank of Australia (RBA) governor, Philip Lowe. Lowe said he expects the economy to shrink by 10% in the first half of this year; marking what he called the biggest contraction in national output and income that we’ve witnessed since the Great Depression.
Domestic interest rates on hold
The RBA left interest rates on hold in April. This followed the two rate cuts we saw in March as officials moved to combat the economic impact of the coronavirus pandemic. In its post-meeting statement, the Bank reaffirmed the targets for the cash rate and the yield on three-year Australian government bonds of 0.25%, as well as the other elements of the package announced at its emergency meeting on 19 March. Officials noted that there remains considerable uncertainty surrounding the near-term outlook for the Australian economy and that much will depend on the success of virus containment efforts and how long social distancing measures need to remain in place. The Bank also said it expects growth to have slowed materially in the second quarter. However, the co-ordinated monetary and fiscal policy response to the coronavirus outbreak should soften the contraction and help ensure the economy is well placed to recover once the crisis passes and restrictions are lifted.
The RBA concluded its meeting by saying it remains committed to doing what it can to support jobs, incomes and businesses as Australia deals with the virus. Officials also expect the comprehensive policy package announced last month will support the expected recovery. Moreover, the RBA said it will not increase the official cash rate until progress has been made toward full employment and inflation is sustainably within the Bank’s 2–3% target range.
Given the risks around the economic outlook right now, coupled with the RBA signalling that interest rates won’t rise until there’s been significant progress toward its employment objective, our view is that the official cash rate will likely remain around its current low level of 0.25% for an extended period. We also expect the Bank to end its government bond purchasing program before it raises interest rates.
Australian dollar rallies
The Australian dollar (AUD) performed well in April, continuing its rise from the near 20-year low it hit in March. The AUD gained on optimism the Federal Government would soon reopen the economy, the RBA’s decision to leave interest rates on hold and better-than-expected March quarter inflation figures. The currency also benefited from signs that China’s economy is beginning to recover. Limiting the AUD’s advance was Standard & Poor’s decision to downgrade Australia’s credit rating from ‘stable’ to ‘negative’ and a series of mixed domestic earnings updates.
The AUD rose 7.8% against the euro, 6.3% against the US dollar (USD), 5.1% against the British pound and 4.6% against the Japanese yen. The broader Australian Trade-Weighted Index1 closed the month 5.7% higher; though it’s still down 4.1% since the beginning of the year.
The coronavirus pandemic has stalled the mini-cycle rebound and made a global recession likely. Although the duration of the pandemic remains unpredictable, monetary and fiscal stimulus, pent-up demand and a lack of major imbalances argue for a solid upswing when the virus threat eventually clears. Provided the virus is transitory, the global economy should be poised to rebound in the second half of this year. However, whilst equity markets are likely to rebound once the virus is contained, the growth disruption from the virus is likely to trigger a 2020 recession, with global gross domestic product growth likely to be negative in the first quarter and at high risk of contracting further in the second. Progress in containing the virus will have a direct impact on the depth of such a recession.
Our view on global equities remains optimistic. Valuations have clearly improved after recent, large market falls. The outlook is more positive once factoring in the substantial stimulus measures being implemented, even though our near-term outlook is for a recession. Equity markets which have been hardest hit by the virus may be those that benefit the most from the eventual rebound. We believe UK and euro zone equities are attractively priced. Europe’s high weighting to cyclical stocks should help it outperform in the recovery. Emerging markets equities should also benefit from the eventual recovery as they too are attractively valued. We maintain an underweight to US equities, driven primarily by their expensive valuations relative to these other regions.
For fixed income assets, we continue to see government bonds as universally expensive. Whilst they may rally if the coronavirus pandemic escalates further, they nonetheless remain at risk of underperforming once the post-virus recovery commences. We believe high-yield debt is now very attractively priced. Although there is considerable uncertainty regarding liquidity risks in credit markets, the current spread to US Treasuries has historically been a rewarding point to add exposure.
In terms of currencies, we expect the ‘safe haven’ rally in the USD will unwind once we reach the post-virus recovery phase. This should favour currencies like the British pound, the AUD and the Canadian dollar, which are now significantly undervalued relative to long-term purchasing power parity comparisons.
Moving forward, the major risks to our 2020 outlook include more aggressive and longer containment measures should the coronavirus pandemic re-escalate when current measures are relaxed. The economic impact of the virus may turn out to be larger than expected, with a sharp plunge in cashflows causing highly-indebted companies to default, triggering a credit crunch in the broader economy. Further, it is possible that global supply chain disruptions could have a larger and more sustained negative impact on global growth. Nonetheless, we remain alert to risks and volatility as we enter a likely global recession. Importantly, we believe this is an environment that will favour our active management approach.
1 The trade-weighted index for the AUD is an indicator of movements in the average value of the AUD against the currencies of our trading partners.