McHardy Financial Update - 21 April 2020
As we continue through these uncertain times all my colleagues at McHardy Financial continue to be on hand to help advise and support you with your financial planning needs. All our staff are working from home and can be contacted by email or by phone.
I have put together a summary of the most recent developments in global markets and economic indicators which are impacting client portfolios:
Global share rally flattens: After hitting a low on March 23, global shares have risen by 24%, but had a relatively flat week last week. While there are positives on a 12-month view, markets are vulnerable to a pullback in the short-term.
Economic data could get worse before it gets better: We should not be looking for signs of an economic turnaround in the data yet. We are only just beginning to see the full impact of the sudden stop in activity come through. Over 22 million people have lost their jobs in the US in the last four weeks. That probably adds about 13% to the unemployment rate when it gets reported next month. Last week saw the first set of US industrial production numbers that reflected life under lockdowns for part of March. It was shocking but not the worst on record. However, it is expected most data to deteriorate again in April which will be the first full month under lockdown in many countries. Even if data next month is the worst ever and eclipses that recorded during the Spanish Flu pandemic or the Great Depression, remember that shareholders still made money in those periods if they stayed invested for 10 years.
Brighter days ahead but it will be patchy: The direction of economic data will change in the coming weeks as we start to see the positive impact of lockdowns being lifted and economic life resuming. However, do not expect a rapid return to normality. As fund manager Howard Marks said: “a mere message from government is unlikely to get everyone returning to their former habits, including their jobs (if they have a choice). Instead the reopening of the economy is likely to be gradual and, until a vaccine is perfected or herd immunity is reached, subject to alternating periods of progress and retreat.” This points to the “U-shaped” recovery as expected by more than half of fund managers in Merrill Lynch’s monthly survey.
What are markets looking for: A huge positive for markets has been the policy response, unprecedented in size and scale and including measures to inject liquidity into markets as well as reinforcing the solvency of companies and households. There has been more stimulus from China over this past weekend, with cuts to key interest rates and plans 1trillian yuan in bonds to finance local infrastructure spending. This Thursday, the EU will meet to discuss more stimulus, among including the coronabond/debt sharing plan. If they fail to agree unified action, markets could react negatively. If they agree on some joint action it will send markets an encouraging message. Investors also have a close eye on countries that are easing lockdowns and progress in drug trials.
Oil Price chaos
West Texas Intermediate (the US oi benchmark) fell into negative price territory yesterday for the first time in history.
Demand for oil has been slashed in recent months due to lower levels of travel as a result of the current pandemic.
However, production has not slowed to the same degree. It is expensive to shut down and reopen wells, as such producers tend to run them at a loss unless drops in demand appear long lasting.
This drying up demand and glut of production have crashed the oil price.
But why Negative prices?
Today is the day the latest round of US futures contracts on oil expire.
These are agreements made many months in the past obligating the parties to sell or purchase oil at a certain price respectively.
As such, any traders holding long positions on these futures contracts will be forced to accept a shipment of physical oil in a month’s time.
Normal procedure for these traders would be to immediately sell the oil to refineries, who would then accept the shipments.
However, refineries are not currently buying oil, and storage in the US is almost at capacity. Oil elsewhere can be stored in tankers, but most wells in the States are significantly in-land.
As such, traders are paying people to take this oil off their hands, leading to the negative price.
This move in WTI is more extreme than other Oil indices as a result Futures Contracts, but it is indicative of the wider problems facing the oil industry.
We can expect a similar, if less severe, showing next month, when the next round of futures expire.
There are reasons for optimism as increasing numbers of countries begin to relax their lockdown restrictions. Last week, hundreds of thousands of workers returned to work in Spain and many shops and small businesses opened in Austria, while schools opened in Denmark.
German Chancellor Angela Merkel also announced on Wednesday that Germany will gradually ease restrictions from next week, starting with some smaller shops. It intends to keep social distancing rules still in place and recommendation to use face masks in public.
France has extended its lockdown until May 11, after which the economy will be slowly opened up again, starting with nurseries, some schools and shops, alongside mass testing for anybody with symptoms and recommended wearing of face masks in public. UK foreign secretary Dominic Raab announced a review of the restrictions in the UK after the current three week period. While infection rates in Spain and Italy have risen in recent days, death rates have continued to fall and they are a more reliable indicator, since infection rates depend on the extent of testing.
The US has released guidelines for state and local governments to follow a three-phased easing process contingent on falling new cases and hospitals over a two-week period before proceeding to each stage that could allow some states to reopen in a month.
Further ahead in its recovery, many Chinese companies are open again but with strict social distancing, travel restrictions and health checks in place. Proof that its economy was coming back to life was evident in better-than-expected trade data released this week, with a fall in exports of just 6.6% in March compared to a year earlier - a big improvement on the 17.2% contraction in January and February. However, the data will inevitably deteriorate again in coming months as the lockdowns among its trading partners kicked in during March, bringing business activity around the world to a halt and destroying demand for its products.
The global lockdown means forecasts for global growth in the coming months make grim reading. The International Monetary Fund (IMF) has predicted the global economy will contract in 3% in 2020, a far bigger hit than during the financial crisis, but will then rebound by 5.8% in 2021. The Office for Budget Responsibility (OBR) said that UK GDP could fall by 35% in the second quarter compared to the first - although this is likely to bounce back in the third or fourth quarters as lockdowns are eased. The OBR also forecast that UK production will return to normal by the end of the year.
If you want to discuss how global markets may be affecting your portfolio please do not hesitate to contact your adviser.
McHardy Financial continues to hold the Chartered Status through our Professional Body the Chartered Insurance Institute (CII). This is only held by a small minority of Financial Advisory companies in the UK and confirms our commitment to providing the highest standard of advice to you.
I hope you stay well and safe during these difficult times.
Chartered Financial Planner
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