Financial markets over the last month
Since our last insight on 13 March, world stock markets are up by 6%: After a further quick drop by 7%, they recovered quite strongly over the last two weeks, with a recovery of 3% just this morning. That still leaves them down 24% from the peak in February. Hard to believe that only 1 ½ months ago we were looking at record highs on world equity markets…
What is behind it
Covid-19 keeps determining the agenda. Social distancing measures have become stricter and seem to yield some results. Numbers issued over the weekend suggest that the curve of new infections is flattening in the EU and in the state of New York. Still: Numbers in US look a lot worse than we hoped for one month ago. And yet US stocks have shown a recovery similar to global markets. The crude oil price is now around the same level it was at mid March. Last week showed a strong recovery, reflecting a growing expectation of a joint effort by Saudi Arabia, Russia and the US to contain the crude oil supply (after a staggering further 35% price drop in late March).
What it will mean
We can now say with some certainty that we are going into a global recession. Most likely, we are in a recession already. Despite big spending programs, many businesses will go bankrupt. Banks will suffer from defaulting loans, and most sectors of the economy will suffer. There may be some winners, also, like companies producing breathing ventilators or certain drugs. And technology facilitating virtual working is certainly in for strong demand. But even IT budgets will suffer if companies just don’t have the funds for new investments. No need to talk about airlines or cruise operators. However, we can also expect that at some point the global economy will recover. Perhaps in a few months, perhaps in a few quarters. What we don’t know is how the recovery in the markets will unfold. It may be swift and sharp (some people talk about a V-shaped recovery), or more protracted. And we may have seen the low point of the market. But by no means do we know that. The recent recovery could well turn out to be what people call a bear market rally. If it does, it will be important to have some liquidity left to benefit from the arising opportunities. As markets crashed, pretty much all stocks lost value. Sales were more driven by the urge to create liquidity rather than by fundamentals. The recent recovery was already a little bit more of a response to specific economic circumstances. Going forward, we expect to see even more differentiated performance of different sectors and companies. And another word on oil: Even with energy demand being depressed for some time, and even with renewable energy sources making fast progress, our world will still require investments in oil production to ensure a steady energy supply. An oil price of 35$ is not sufficient to support such investments (let alone 22$ like we have seen recently). A stabilised oil price means less petrodollars to be pulled from equity markets.
What to expect – and what to do
Warren Buffet suggests that it is good to be fearful when others are greedy. And to be greedy when other are fearful. Over a 10 year bull market rally, market participants had become complacent, with corrections always turning out to be opportunities to buy. Six weeks ago, markets were clearly in “greed mode”. Today, they are clearly in “fear mode” – there is a lot less appetite for risk. That means that the expected reward for risk has increased. When talking to clients in January, we put pretty heavy caveats on return expectations: “An equity portfolio making 10% annual return over 10 years? Expect that to be difficult to replicate”. Today, we would be more optimistic. Despite covid-19: Given today’s prices, the long-term opportunities are clearly better than they were a couple of months ago! But benefiting from them will require stamina and good nerves. And it will require more expertise to direct investments towards the sectors and companies that are most undervalued relative to their financial standing and post-corona opportunities. That is what our portfolio management is here for. Even if you don’t use that service, your advisor can help you keep your long-term plan intact. We wish you good health – physical and financial!