As market turmoil continues, we consider the outlook for global equities.
- Concerted central-bank action leaves investors unimpressed
- We expect equity-market volatility to persist
- We believe opportunities are emerging in businesses with low leverage, differentiated business models and strong structural growth potential
- We think taking a long-term view is crucial
More wild gyrations have tested the nerves of investors as they try to get to grips with the impact of the coronavirus and promises of fiscal loosening by governments, against the pre-existing backdrop of structurally low economic growth in the wake of the 2008-9 financial crisis. Following attempts by various central banks to assuage both economic and market uncertainty, a group of them led by the US Federal Reserve announced aggressive and concerted action, including a US interest-rate cut of a full 1%. This takes rates back to levels last witnessed in 2009, and is accompanied by injections of liquidity designed to ease distressed credit markets. Investors were unimpressed, with sharp falls registered across equity exchanges across the globe in the wake of the announcement. In a recent development, the European Central Bank also launched a €750bn bond-repurchasing program designed to alleviate market concerns over liquidity and upward pressure on sovereign yields in some eurozone states, notably Italy, as fiscal discipline is relaxed in anticipation of the coronavirus’s economic impact. Markets took this highly positively on its announcement but, at the time of writing, its effect was fading somewhat.
On Market Volatility
It was widely believed that the early phases of this market volatility were a ‘healthy correction’, as investors marked equities lower after a period in which they had got ahead of themselves. However, as the last few weeks have unfolded, there has been a growing fear that the world faces a perfect storm. The Saudi/Russian oil-price war, which played a major part in catalyzing market turmoil, does not even, for now, seem to bring the silver lining which comes to economies in these situations in the form of cheaper energy, as increasing numbers of consumers are falling ill, working from home or self-isolating in an effort to avoid the coronavirus.
Bans on international travel being imposed on an increasingly widespread basis, and severe nationwide lockdowns, have added to the sense of crisis. The economic impacts are likely to be significant; and any bounce-back as the year wears on may not bring bourses back to immediately preceding levels. Interest-rate cuts such as those mentioned above are essential in attempting to steady shaky credit markets reeling from the significant impact on the energy industry from falling oil prices; however, they can do little to nullify the supply-side shock originating from supply-chain disruption in China.
On Global Equities
Movements in both directions are likely to be extreme for now and equities exceptionally volatile. But we believe opportunities are starting to present themselves in businesses with low leverage, differentiated business models and strong structural growth potential. Obviously the stocks of many of these companies are available at materially lower prices than they were a month ago. They may get cheaper still. Clearly a strong nerve is required and it may well get darker before we see the light; but, for those taking a long-term view, we believe some attractive entry points are beginning to emerge.
Authors
Paul Markham
Head of Global Opportunities
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.
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