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Davy update to private clients - 3rd April 2020

03rd April, 2020

The month of March is finally over, and what a month it was. We had a rapid expansion in virus infections around the world, and most governments shut down their economies to stop its spread. Jobs are being lost at a startling rate, prompting massive government action to support workers and businesses. Importantly, central banks have stepped in too, to prevent the health crisis from becoming a financial crisis. Stock markets fell at a record pace earlier in the month, with volatility reaching record highs, and settled down towards the end of the month. As we survey the world from our isolation, where do things stand now?  

The Coronavirus (Covid-19)

The number of infections worldwide continues to rise, approaching the one million mark. The United States has become the new centre of the pandemic, with over 200,000 cases. Sadly the global death toll has passed 47,000. However, while the US numbers deteriorate, the picture is improving elsewhere. In Italy and Spain, which have suffered terribly, the daily numbers of new cases are falling. This encouraging news confirms that lockdown strategies can be effective. In China and South Korea, new case numbers are staying low, and restrictions are gradually being lifted.

The economic impact — now visible

After weeks of drastic forecast revisions and dramatic survey declines, we finally saw the impact of the shut-down in the real economy. In the third week of March, over 3.2 million Americans filed for initial jobless claims. This was over four times the previous highest increases, seen in 2008 and 1982.  To balance this, governments around the world continue to announce record stimulus packages to sustain households and businesses through the economic standstill.

On a positive note, the Chinese PMI (Purchasing Manager Index) survey, which saw a record decline in February, showed a record increase in March, bouncing back almost to its pre-virus score. This doesn’t mean that the Chinese economy is back to its pre-virus level, but that it has stopped contracting, and is starting to expand again, albeit from a lower level.

The market reaction — moving on?

There is an old market saying – “buy the rumour, sell the fact” – which describes the market’s tendency to move in anticipation of something happening and then fade when it actually happens. Perhaps this explains why the MSCI World was up 10% last week, at the same time as our fears were realised in the data when the virus cases and jobless claims exploded.

However, we have indeed seen several important signals for market recovery. Equities and credit fell by amounts consistent with a recession, governments have acted with convincing sized stimulus packages, and the daily infection rate is slowing down outside the US. This is all positive for investors, but it remains to be seen how markets and consumers will react when the economic data deteriorates further, which we fully expect it to.

Our investment view

As we mentioned in previous notes, we try to take the longer-term view in our centrally-managed discretionary portfolios. On this basis, we had taken the opportunity of the current extreme situation to temporarily add more equities. While we’ve been encouraged by the positive developments outlined above, we know that the crisis is far from over. Therefore we are waiting and watching before changing our equity allocation again and looking at other asset classes as well. For advisory clients, potential portfolio adjustments are discussed between the adviser and the client with relevant proposed changes in the context of the client's individual circumstances.

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