Market Commentary

As unexpected shocks go, Coronavirus ranks in the very top tier of events capable of disconcerting investors, amongst the Great Financial Crisis (GFC) and Black Monday. Whilst news continues to horrify many investors with the human and economic implications, buried in the latest data in what statisticians refer to as “the inflection point of a logistics curve”, is a sign that the very worst may be over. February news was dominated by the global spread and impact of the Coronavirus (Covid-19). Dow Jones, S&P 500 and the FTSE All-Share fell by over 14%, 12% and 11%. So far in March (16th March 2020), these Index markets have been continuing their decline and the correction has now developed into a full-scale bear market.

[This post is a follow-up to that of October 2019, in the light of further falls in interest rates; the message remains very much the same however: stick to the plan. Changing asset allocation in response to market movements remains fraught with danger. Stay diversified].

More than two years ago, we discussed the rise in social unrest across the globe as nations start to split apart. This has got much worse since then and it appears to have become generalised as the cleavage between populations has now spread to families. Why now and how will it all end?

A pub quiz question- what has been going on for more than 3 years, amid much frustration and bemusement to all involved, having got nowhere at all during that time and is not Brexit?

“At the end of the day, it’s not a normal condition to have interest rates at zero”- Lloyd Blankfein (Goldman Sachs CEO). Quoted in June 2014.

Equities can be seen as a “call option”on the future growth of a company; once the liabilities due to bondholders are paid, the surplus accrues to shareholders in the form of dividends/share buybacks, etc. or are re-invested to generate future growth in the firm. At least, this is what happens most of the time, but every now and then, things go awry, a company fails and the “call option” expires worthless. It is not a common occurrence, but when it does happen, the shareholders tend to lose everything.

“If you gaze long enough into an abyss, the abyss will gaze back into you” – Friedrich Nietzsche. Amidst the sound and fury of trade war rhetoric, there are signs of problems in the banking system in China. In the last 3 months, there has been a spate of previously unknown events there – bank defaults. This week’s news of a delay in the implementation of (some of) the US tariffs on Chinese goods led to an immediate spike higher in shares (and lower in bonds) but has not changed the situation that has plagued the Chinese banks.

“Whatever hysteria exists is inflamed by mystery, suspicion and secrecy. Hard and exact facts will cool it”- Elia Kazan (Broadway and Hollywood Director). We last wrote about the US Yield Curve at the end of March this year, but since then, speculation about it appears to have run rampant. Markets now seem certain of a recession, with timing the only bone of contention. As a consequence, the world is now awash in bonds that have negative yields, ($16.7 trillion, as per Bloomberg chart below), meaning that investors are paying issuers to own their bonds. On the face of it, this makes absolutely no economic sense whatsoever. As of early August, European government bond yields were deep in negative territory, with UK Gilts not too far behind. This week, (16/08) 10-year Gilts were yielding the princely sum of 0.45% per year.