Global lockdowns escalate
Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets last week (16 – 20 March 2020).
The financial crisis, which started more than a decade ago, was a problem in financial markets that spilled over into the real economy. The global spread of coronavirus, and the action taken by governments to save lives and allow their country’s health systems to cope, is a real-life crisis that has spread into financial markets. That means the policy responses will need to be different to deal with the fallout.
The main central banks – the US Federal Reserve, the Bank of England and the European Central Bank have launched rapid and impressive monetary measures to keep markets liquid. However, it is the fiscal response that is likely to be more important in this crisis than the one we saw a decade ago.
Many companies are enduring a major cashflow crisis, which could lead to them having to cut costs and shed staff to continue trading and meet their banking covenants. However, a significant rise in unemployment in major western economies would exacerbate the economic challenges. So, government action now needs to be aimed at preserving the millions of jobs that are at risk to support people and companies.
In the UK alone more than 200,000 people previously employed in the leisure and hospitality sectors have lost their jobs due to Covid-19. A poll conducted in the US this week showed that 18% of adults reported that they had been laid off or that their work hours had been cut as a direct result of the infection. Government action, therefore, needs to target this problem if it is to be effective.
On Friday afternoon, UK Chancellor of the Exchequer Rishi Sunak will announce measures that aim to do just this. At this stage, it is unclear whether the UK will follow the lead of countries such as Denmark, where the government has promised to cover 75% of salaries at private companies for three months, if they promise not to let staff go. It was, however, believed to be under discussion.
The measures will represent the biggest state intervention in the UK economy since World War II but more is likely to be needed in the coming months. This is the correct action to ensure that businesses can survive a short-term cashflow crunch and protect the income of individuals.
Charles Stanley believes that volatility is likely to continue in coming months and the market may have further to fall. On a longer-term view, valuations are cheap – but uncertainty about cashflows, corporate earnings and whether some debt-laden companies can keep their heads above water will drive markets for a number of months.
Message from, Paul Abberley, our Chief Executive
In light of the uncertainty we are all facing in our daily lives with the outbreak of Covid-19 coronavirus, Charles Stanley has taken a number of steps to ensure we are operationally and financially prepared for all scenarios. Paul Abberley, our Chief Executive, explains what we are doing and how we can help here.
The dollar still reigns as king of currencies in times of turmoil, with the Japanese yen also offering investors its usual port of safety. Sterling has, however, slumped sharply this week and is trading at levels not seen since 1985. The pound fell about 4.2% against the dollar over the week by mid-session on Friday, to trade at about $1.176.
There is no single reason to blame for the fall in sterling. Andrew Bailey took the reins of the Bank of England this week, with his reaction to the Covid-19 crisis vital for markets seeking reassurance. The currency suffered from a combination of heightened demand for the dollar, due to its liquidity and safe-harbour appeal, concern over the UK government’s strategy to deal with the virus, and the fact we have an external trade deficit, which means the economy needs capital inflows to fund this gap.
What are the implications of currency-market moves for investors?
On a long-term basis, such currency movements mean very little, because they tend to cancel out over economic cycles. Nevertheless, over shorter periods of time, these changes can matter more.
In a diversified portfolio, investments priced in dollars are worth more when converted back into sterling at times of dollar strength/sterling weakness. This will provide some cushion for some of the market falls in absolute terms seen in US indices. The currency factor is why the return on your foreign investments won't always match the index returns you see online or in the news. Dividend streams that are priced in dollars, and there are many from companies listed in the FTSE 100 due to its international focus, will also see a boost when translated into sterling if they are maintained at the same level. It must, however, be noted that many dividends are likely to be reduced or cut.
So, what next?
Charles Stanley has developed three scenarios as to how things might play out. John Redwood outlines the possibilities and provides his view on the possible economic consequences and market reaction here.
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Garry White is Chief Investment Commentator at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.