Market Update – 17th March 2020.

As more cities and countries around the globe impose travel restrictions, ban public gatherings and close schools, equity markets have again fallen as they adjust for the greater uncertainty and potential economic costs caused by disruptions to global supply chains.

For example, last night the S&P 500 lost 11.98% and the Dow Jones fell 12.93% (the largest falls since 1987), while the NASDAQ had its biggest drop since 1971 after closing down 12.32%.

As a result, the FTSE-100 has opened down again this morning.  As I write, it is down 90 points (1.75%) at 5,060.

Although it is disappointing that the recent positive moves by the global central banks have not been able to reverse the extreme and cheap valuations which companies now trade, the current disconnect between fundamentals, valuations, and market prices is a positive for patient, long-term investors as the best time to invest is when others are suffering from disbelief and demoralisation.

However, we also expect there will be a fiscal response after Larry Kudlow, Donald Trump’s economic adviser, said the White House will do whatever it takes to protect the US economy from grinding to a halt – and the best way for the US to deliver stimulus which reduces a business’s incentive to release workers, is an across-the-board payroll tax cut for employers and employees.

This fiscal stimulus would put a clear floor under the market and provide a springboard for recovery once the coronavirus outbreak subsides – hence our view that this will only be a short, sharp economic shock and a potential mild recession, rather than a severe and protracted global downturn, which equity markets now appear to be expecting and pricing.

While the negative impact from coronavirus is clearly an ongoing and developing story, we believe that the negative impact on the global economy (and company profits) is likely to be limited to the first half of 2020 – and as a result, we believe that once demand picks up in the third and fourth quarters of 2020, global equity markets are likely to recover strongly.

Consequently, whilst we remain positive on equities over the long-term, particularly those in Asia and Emerging Markets, with infections continuing to rise, we expect equity market volatility will remain elevated in the short-term – and as such we are maintaining our short-term cautious stance with a slightly higher than normal level of cash and will invest this as soon as the current fears start to dissipate.

Investment Management Team

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