Last week was another eventful period for investors with equity markets pulling back, which was hardly surprising given that they had rallied by over 20% from their lows. The decision by Royal Dutch Shell to cut its dividend, the first cut since the end of World War II, highlighted the severity of the economic downturn and the impact it is having on even the largest companies.
Politicians across Europe are now facing the same dilemma, namely how to restart their economies without creating a second wave of Coronavirus cases. Most countries have seen a decline in both the number of new cases and fatalities, and in the case of Italy and Spain this has resulted in the gradual easing of the draconian restrictions imposed on their respective populations. The UK has yet to announce an end to the lockdown but it is clear that Boris Johnson is now coming under enormous pressure from both business leaders and his own backbenchers to gradually lift the restrictions. Further details should be announced later this week.
From an economic perspective we are now arguably at the low point, even if it will take time for this to be reflected in the data, as any relaxation in the current rules will result in a recovery. It is far from certain, however, that the economic ‘bounce’ will be as rapid as some commentators expect. Social distancing will become the new norm, making business both more difficult and more expensive, as evidenced by an earnings report from Amazon. We will also face a barrage of cautious statements from companies over the coming weeks, and both economists and analysts are busy downgrading their forecasts. At the end of this week the US will release employment data and it is likely to confirm that 30 million Americans have lost their job since this crisis started, a truly startling number.
We know that economic conditions will improve as evidenced by China, which is probably two months ahead of the West in terms of the pandemic cycle, but even here consumers seem understandably wary of visiting shops and using public transport. This would suggest that our own recovery might be more muted than the recent move in equity markets would suggest, and as a consequence volatility will likely continue. Any pull back will, in our view, present a good entry point for investors with a medium time horizon.
Please contact us if you have any further questions or wish to discuss your portfolio in more detail.