Now that Boris Johnson has returned to full time work and next week we will receive a ‘comprehensive plan’ on how the economy will restart after the UK has past the peak, we seem to be seeing light at the end of the tunnel in our fight against COVID-19. However, whilst this is of course welcomed, we believe that there is still an extreme downside risk within the current market.
The contrast continues: on the one hand, estimates of the economic damage occasioned by the fight against Covid-19 darken by the day; on the other, equity markets are behaving as though the end of a mild recession is around the corner. The slump in the U.S of 4.8% for Quarter 1 of 2020 is close to catastrophic – comparing to 2008 / 9 the fall in Gross Domestic Product (GDP) was just 3.98% at its worst. Also in the U.S, Retail sales and manufacturing output have fallen of a cliff in the month of March. Those changes have occurred in an economy that wasn’t in lockdown for the full month, so numbers are expected to worsen in April.
The numbers for Quarter 2 that are predicted globally are quite staggering. On 14 April, the UK’s Office for Budget Responsibility published a fiscal analysis that assumed UK GDP would fall 35% in Q2 (not annualised), with a 2020 decline of 13% (based on a 3-month lockdown with recovery thereafter). France’s National Institute of Statistics and Economic Studies (INSEE) published an updated analysis on 9 April that suggested the lockdown is causing a 36% loss of economic activity. In the U.S, Morgan Stanley have forecast the that the U.S could decrease by 38% during Q2.
Given all the above, how is it possible that stock markets are doing reasonably well (as of 29 April, the FTSE 100 turned positive again from its February and March falls?) Perhaps we are wrong about how this economic downturn translates into corporate incomes and balance sheets (maybe due to policy actions)? It seems apparent to our analysis, that there is a lot of complacency within the current market, and comparisons can be drawn with the late 1920’s and the bear market rally that occurred then. Markets fell 48% back then, which would have felt like the bottom in late 1929, recovered over a 6 month period and then began to fall again in April 1930. Eventually, the Dow Jones shed 89% from its September 1929 top.
At Greenfields we continue to hope that our client’s families and friends stay safe in the current crisis. The ultimate human cost that this virus is having cannot be put into words and this is the quite rightly the central concern of everybody’s right now. We will continue to monitor the economic situation and will be in touch with clients regarding any changes that we feel are necessary to portfolios.
Written by Greenfields Financial Management Ltd.
This article is for information only and should not be treated as advice. No action should be taken in respect of this article without independent financial advice. This information represents the opinion of Greenfields Financial Management Ltd. only.
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