May Market Commentary 2020

Right now, even a week seems a long time in the news agenda. Remembering the end of March, when we wrote our last Market Commentary, feels like looking back into a different era.

Reflecting back, how did we leave March? With the US having overtaken China as the country with the most confirmed cases of coronavirus: with the UK’s Prime Minister, Health Secretary and Chief Medical Officer having all tested positive for the disease – and with world stock markets having suffered their worst three months since 1987.

“The figures that follow will not make for pleasant reading,” we wrote. “It is scant consolation that they would have looked much worse in the middle of the month, before governments around the world rushed to put stimulus packages in place to protect their economies and businesses”.

Well, there’s still plenty of bad news in this commentary. Both China and America reported sharp falls in their first quarter GDP – in China’s case, the first fall since they started recording quarterly figures in 1992 – and the figures for the second quarter will be far worse. Whichever organisation you turn to – the World Bank, the International Monetary Fund, the ratings agencies – they are all making dire predictions. The IMF, for example, is forecasting the worst economic depression since the 30s.

Despite this, world stock markets have risen: all the markets we cover in this commentary were up during April.

Of course the world will look very different when we finally emerge from this crisis. With the Times predicting we’ll need to be at an airport four hours before our flight – for medical screening as well as security – we’re glad we didn’t choose a career in the airline business this morning.

But where there is change there is also opportunity: new companies will find new ways of bringing new products to new markets. Let’s look at all the details from April – a month when the Prime Minister survived three days in intensive care when, “it could have gone either way” and became the father of a baby boy – and see if we can find some light amid the gloom.

Coronavirus: Fighting Back 

Almost without exception, countries around the world have put stimulus and rescue packages in place to protect businesses and jobs. In the UK – following widespread criticism of the banks – Chancellor Rishi Sunak has said the Government will now guarantee 100% of loans to small companies, up to a maximum of £50,000. These ‘bounce back’ loans will be available from May 4th.

For bigger firms, the Government will continue to guarantee 80% of the loans, with companies whose turnover exceeds £45m now able to apply for up to £25m of finance, and companies with a turnover of more than £250m eligible for up to £50m of finance.

The job retention scheme also swung into action, with the UK Government effectively employing a million extra people on the first day it was in force.

In the US, the Federal Reserve has perhaps gone even further, offering to buy debt from big companies, helping out local and state governments and lending directly to small and medium sized businesses. These loans are over a four year period – perhaps an indication of how long the Fed believes some companies will take to get back on their feet…

These measures represent a huge commitment on the part of governments: for example, the Guardian estimates that Europe’s rescue package is worth a combined €1.7tn (£1.6tn). They will all need to be paid for one day and – inevitably – there will be countries who struggle with the increased debt burden. You suspect that the impact of coronavirus will be felt long after someone has found a vaccine.

UK 

The UK headlines at the beginning of April made universally grim reading. ‘A fifth of small firms will run out of cash.’ ‘One million people apply for universal credit.’ ‘Sunak shakes up loan schemes amid widespread criticism of the banks.’

…And that was before you went anywhere near the nation’s high street.  Depressing headlines from the retail sector included: ‘March was the worst retail month on record,’ ‘Debenhams facing administration’ and ‘Oasis and Warehouse go into administration.’

There was plenty more bad news throughout the month and there will undoubtedly be more to come. As Sir John Timpson – of the eponymous high street chain – said, “some household names will simply disappear”.

As we noted above, the UK Government will now guarantee 100% of loans to small businesses up to a maximum of £50,000. This may turn out to be the most important business initiative of the whole crisis: it will mean that thousands of small companies that might have otherwise failed will now survive the pandemic.

Yes, it is hard to find good news in the short term – although cheaper clothes and fuel did see UK inflation fall to 1.5%. The figures for the first quarter will undoubtedly show a sharp fall in UK GDP, and the current predictions are that it could fall by anywhere up to 35% in the second quarter. In the middle of the month, the Guardian was predicting up to 2 million job losses.

But, as the Prime Minister said in his briefing on 30th April, the UK appears to have passed the peak of the first outbreak. The challenge now is to relax the lockdown and re-start the economy without risking a second spike. As the Chancellor said, the UK came into the crisis with “a fundamentally sound economy”. Like him, we are confident that the country – and its economy – will bounce back.

The FTSE 100 index of leading shares echoed that optimism. Despite falling 200 points on the last day of the month, it ended April up 4% at 5,901. The pound was up by 1% against the dollar in the month, closing at $1.2587.

The Brexit Negotiations 

Do you remember the good old days? When the Brexit negotiations dominated the news agenda? When Theresa May brought her Withdrawal Bill back to Parliament three times? When every vote – in the Commons or the courts – seemed crucial?

The Brexit negotiations are still ongoing. Lest you have forgotten, an agreement with the EU is due to be reached by the end of the year. As things currently stand, if no agreement is reached, the UK will begin trading with the EU on World Trade Organisation rules.

The talks to find an agreement duly resumed after Easter and by the end of the month both sides seemed to accept that some – albeit limited – progress had been made. Inevitably, there were calls to extend the current deadline: Norbert Röttgen, chair of the Bundestag’s foreign affairs committee and an ally of Angela Merkel, told the Observer that the deadline would need to be extended by two years.

Not so, said Michael Gove to the Telegraph, as he explained that the current crisis was exactly why a deal should be wrapped up quickly.

We will, of course, continue to keep you updated. One thing that is certain, though, is that UK/US trade talks have been postponed indefinitely while the two countries deal with coronavirus.

Europe 

It was a while coming, but in the middle of the month, the European Union finally agreed a €500bn (£434bn) rescue package for countries hit by the pandemic, with an opinion poll showing that German voters were in favour of supporting the economies of Spain and Italy.

How far the money will go is questionable, with the chairman of French car giant Renault saying the company needed €5bn (£4.3bn) “to protect it from damage from the coronavirus pandemic”. He added that they “are working on the idea of bank loans that would be guaranteed by the state”.

As we mentioned above, the combined bailout packages put in place by the individual European countries run into the trillions of Euros. European economies will need to revive quickly and as the month ended, there were signs of a partial easing of lockdown measures in several countries.

Confidence will also need rebuilding, with consumer confidence falling to levels last seen in the financial crisis of 2008, and business confidence in Germany described as ‘catastrophic.’

The Ifo Institute think tank’s business climate index slumped to 74.3 in April from 85.9 in March – a level never previously seen. “Sentiment at German companies is catastrophic,” said Ifo president Clemens Fuest. “Companies have never been so pessimistic. The crisis is striking the German economy with full fury”.

As if to reinforce this, the last day of April brought the news that the Eurozone economy had shrunk at a record rate, with GDP falling by 3.8% in the first quarter of the year.

Despite all the gloom, the leading European stock markets rose in April, dragging the smaller markets up with them. The German DAX index was up 9% to 10,862 while the French stock market rose 4% to 4,572.

US

For as long as we have been writing this Bulletin, we have included almost the same sentence in every section covering the US: ‘last month saw the US economy add another 150,000 jobs.’ Or words and numbers to that effect…

Nothing more starkly illustrates the impact of coronavirus on the world’s biggest economy than April’s jobs figures. On 3rd April, we noted: ‘US jobless claims soar to 6.6m as 236,000 test positive.’

On the last day of the month it was reported that 3.8m Americans had filed jobless claims in the last week, down from 4.4m in the previous week. Over the last six weeks, approximately 30m Americans have lost their jobs as some states have all but shut down their economies, with the country now having more than a million confirmed cases of the virus.

The US government has, of course, sought to counter this with an unprecedented fiscal and monetary stimulus, passing bills worth around $3tn (£2.4tn), while the Federal Reserve has slashed interest rates, pumped trillions of dollars into the economy and started lending directly to small and medium sized companies.

Will it work? The President is confident that the economy will ‘bounce’ back quickly and that the US will shortly be testing 5m people a day – against a current figure of around 300,000.

In company news, Disney stopped paying 100,000 of its workers but announced that it had added 50m subscribers in five months to its subscription service, Disney Plus. Confirming the ‘ill wind’ theory, Netflix said it had added 16m subscribers during the crisis.

Ford reported that it had lost $2bn (£1.6bn) in the first three months of the year as sales dropped 15% and Starbucks confirmed sales were down 10% in the first quarter – but 50% in China. However, lockdown was good news for Mondelez, owner of Cadbury, Oreo and Triscuits, where quarterly sales surged by 15%.

You know what they say: ‘When the going gets tough, the tough start snacking…’

The Dow Jones index – in line with other world stock markets – was much more Oreo Cookies than Ford or Starbucks, rising by 11% in the month to finish April at 24,346.

Far East 

What impact did the virus have on the Chinese economy? Economists and forecasters waited for China’s first quarter GDP figures to be announced, with some pundits expecting a fall in the country’s GDP of up to 10%.

In the event, the figure was 6.8% – the first quarterly fall since the country started recording quarterly economic data in 1992.

“This will translate into permanent income losses, reflected in bankruptcies and job losses,” said Yue Su at the Economist Intelligence Unit.

…And not just in China. As we will see below, the virus will hit emerging economies especially hard, with the International Monetary Fund predicting that the wider Asian economy will see no growth this year, for the first time in 60 years. The IMF says the region will “face the worst recession since the Great Depression”.

This was reflected to some extent in HSBC’s first quarter profits, which halved to $3.2bn (£2.6bn) as the company announced that it would put the ‘vast majority’ of its planned 35,000 redundancies on hold due to the ‘exceptional circumstances.’

In line with all the other leading stock markets, the four major markets in the Far East all made gains during April. South Korea led the way, rising by 11% in the month to 1,948. The Japanese Nikkei Dow index rose 7% to 20,194 while the markets in China and Hong Kong were both up by 4% to 2,860 and 24,644 respectively.

Emerging Markets 

It hardly comes as a surprise but April was a worrying month for emerging and developing economies around the world. Clothing manufacturers – among the biggest employers in Asia – gave a dire warning of the impact the virus would have on employment. Sadly, the clothing sector was far from alone in issuing warnings.

The International Monetary Fund expects 170 countries (out of 195 recognised by the UN) to experience a decline in economic activity per person this year, which will translate into a direct fall in average living standards. The World Bank expects that the virus will mean South Asia – home to economies such as Bangladesh, Pakistan and Sri Lanka – will see its worst economic performance for 40 years.

Despite this, Facebook chose to place what the papers described as ‘a $5.7bn (£4.6bn) bet on India’s richest man.’ Facebook is buying a 9.99% stake in mobile internet company Reliance Jio which will give it a major foothold in India, where WhatsApp already has 400m users and is about to launch a payments service.

And it was the Indian stock market that led the way, turning in the best performance of any of the markets we cover in our monthly commentary. It was up 14% in April to end the month at 33,718. The Brazilian market was up 10% to 80,506, while the Russian stock market rose 6% to close at 2,651.

And finally…

April got off to the worst possible start for beer drinkers, with news that up to 50m pints of beer could go to waste if lockdown lasts until the summer. The estimate was made by the Campaign for Real Ale (CAMRA), based on the amount of beer the UK’s 39,000 pubs will have in their cellars and the length of time it takes to turn bad. Tom Stainer, chief executive of CAMRA, told the BBC it was “a tragic waste”.

April wasn’t a month that went terribly well for Brant Walker either. Brant is the mayor of Alton, a small town in Illinois with a population of just under 30,000.There were widespread reports of residents ignoring lockdown and social distancing, so Mayor Walker quickly ordered the local police to ‘vigorously enforce’ the rules.

The next day, Alton’s finest broke up a party at the town’s Hiram’s Tavern, with revellers “clearly disregarding” the Mayor’s executive order. One of those at the illicit party was a lady called Shannon – unfortunately, Mayor Walker’s wife. “I am embarrassed and apologise to the citizens of Alton,” said the mayor in a statement. “My wife … showed a stunning lack of judgement”.

Oh to be a fly on Mr and Mrs Walker’s kitchen wall…

And quite possibly on the cucina wall of Signore and Signora Faggiani as well. Bored with lockdown, Fabio Faggiani decided to run a full marathon, inside his apartment. He did this by running round his dining room table: completing the full distance of 26.2 miles meant that Fabio had to lap the table 2,800 times.

There is no word yet on whether Signora Faggiani was trying to watch television at the time. Or, indeed, on whether the people in the apartment below were cheering Fabio on.

We might, in previous bulletins, have jokingly referred to Messrs Walker and Faggiani as ‘heroes.’ April brought us a real hero.

We refer, of course, to Captain Tom Moore, who wanted to walk 100 laps of his garden before his 100th birthday and, in so doing, perhaps raise a “bit of money for the NHS”. As we write this – very appropriately, on Tom’s 100th birthday – that ‘bit of money’ so far amounts to over £31m. Happy birthday, Colonel Tom: never was a promotion more richly deserved.  We salute you!

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