The Lowdown │ Global Markets to 4 May 2020

The Lowdown Global Markets to 4 May 2020

Published May 4, 2020


  • Investors buy into optimism rather than sell into pessimism, pushing global equity markets higher.
  • The S&P 500 Index and the Dow Jones Industrial average surge.
  • But data remains grim: unemployment rises, economies shrink and Q2 corporate profitability looks poor.
  • The technological revolution accelerates on the back of Covid-19: companies in the sector see increases in their consumer and subscriber bases.
  • Dividend cuts and suspensions are announced, but all is not lost for income-seekers.
  • Long-term investors should remember Warren Buffett’s words: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”.

Global Market Summary

Global equity markets edged higher last week as investors continued to buy into optimism rather than sell into pessimism, hoping that the Covid-19 pandemic ends up being temporary, and that a V-shaped recovery will eventually emerge. Optimism appears to have underpinned most of the last month: many global equity markets rallied strongly, delivering their best monthly returns in decades.
Indeed, in the US, the S&P 500 Index posted its third-largest monthly gain since World War II, surging by 12.7%. This was also its most impressive one-month gain since 1987. Similarly, the Dow Jones recorded its fourth-largest post-war rally – an 11.1% gain – and its best month in 33 years. The NASDAQ also surged – 15.5% for the month, its biggest monthly gain since June 2000.
We are living through truly extraordinary times, with the equity markets responding to daily events as they unfold, creating a rollercoaster ride for investors. Needless to say, this recent rally in global equities is not being driven by fundamentals. It’s been driven by the liquidity support from the leading central banks around the world, particularly the Federal Reserve Bank.
With more than 30 million Americans having recently lost their jobs, the US economy having contracted dramatically over the last quarter and the likelihood that the second quarter corporate earnings will be dreadful, the fundamental outlook is grim. However, investors now appear to be looking beyond all the carnage of the global economy and are buying stocks in the hope of better times ahead.
Unfortunately, after such a terrible March, the markets may have got ahead of themselves: further bad economic news is likely to come over the next few weeks. The lockdown is having devastating consequences for many industries, with the airlines and cruise industries being among some of the hardest hit.
The dramatic reduction in air travel has forced IAG-owned British Airways to cut up to 12,000 jobs out of its total workforce of 42,000, and there is every likelihood that it will take air travel several years to return to its pre-virus levels. Other airlines have suggested that implementing social-distancing rules will be practically impossible, which will ultimately lead to a wide-ranging financial reconstruction within the industry.
This obviously all sounds somewhat depressing, but as we have pointed out in previous editions of the Lowdown, a number of demographic changes and transformations within various markets, sectors and the global economy more generally have been taking place for some time. In actual fact, what has happened is that Covid-19 has accelerated these trends in recent weeks.
In concrete terms, sectors such as technology and healthcare have benefited from large numbers of people switching to online shopping and cloud computing. Similarly, home entertainment services and food suppliers have enjoyed a marked boost. So, companies such as Amazon, Microsoft and Netflix have reaped the rewards of this accelerated transition under the lockdown.
This is evidenced in the first-quarter corporate earnings results. And given the likelihood that Covid-19 will continue to affect the lives of consumers in the workforce until we have vaccine, many of these companies will enjoy further success. Even once the world starts to return to something resembling normality, general consumer spending trends are likely to remain changed and be more tepid (with job losses and a higher percentage of remote workers). However, this will create an even better opportunity for innovative businesses that leverage advanced technology to offer consumers excellent value.
It will obviously take the world some time to adjust to the havoc that Covid-19 is wreaking upon it. But what is certain is that the digital and green revolutions will continue apace, changing the way we work, spend and save money and live our social lives. Indeed, neither of these phenomena is likely to abate: global businesses and consumers are seeing the real benefits of the digital and green revolutions, both in their workplaces and in their leisure activities.
Just as the Covid-19 pandemic is disrupting the global economy, it is also disrupting the distribution of dividend payments. Last week, Anglo-Dutch supermajor Royal Dutch Shell cut its dividend for the first time since the Second World War.
More and more companies are now announcing dividend cuts and suspensions in a bid to conserve cash and try to keep their businesses solvent. This policy makes sense, but for income-seekers, it’s a major blow – particularly when the UK equity market has a heritage of delivering higher-than-average dividend pay-outs and dividend growth.
This situation is likely to get worse before it gets any better, and with the world likely to be significantly less globalised in the future, UK dividend pay-outs could be much lower than they have been historically – even once Covid-19 has been defeated. Future dividend strategies will therefore be vital.
Globally, thousands of fast-growing companies will pay shareholders respectable dividends. This means that a global approach will give you a better chance of meeting your income requirements.
Unfortunately, the FTSE 100 Index is made up of many companies in energy, mining and banking, all of which have suffered harsh dividend cuts or suspensions. But that does not mean that we are unable to find UK equity income fund managers with robust businesses in their portfolios and income support.
May has begun with the distinct possibility that the lockdown will continue, and so commentators are starting to wonder if the markets will continue to rally. Indeed, that age-old adage – “Sell in May and go away and come back on St Ledger’s day” – is one that springs to mind.
Between 1950 and around 2013, the Dow Jones industrial Index posted lower returns in the period May to October compared with November to April. But since 2013, the data suggests that this seasonal pattern might be flawed, and that investors who follow it might miss out on significant returns.
These are extraordinary times. Government and central bank policies are whipping up panic and euphoria in equal measures on a daily basis, meaning a rollercoaster ride for global investors.
But this has provided long-term investors such as us with opportunities to invest carefully in those regions and sectors that we believe will give us the best returns in the long run. We will also be able to take advantage of some of the factors that are going to change the way businesses and consumers work and spend their leisure time.
The world was in a transitional phase before the pandemic hit. What it has now done is push it further along that same path of change, but at a much faster pace. There will eventually be a decent global economic recovery, but it may be some time before levels return to the ones seen in January and February of this year.
As far as the actual virus is concerned, it is unlikely to disappear until we have a vaccine – numerous pharmaceutical and biotechnology companies are currently working alongside medical health organisations on developing a solution. In the meantime, however, with the lockdown still in place, it is technology that is bringing families together, helping them in their day-to-day lives. This means that this same technology is extremely important and may well end up proving to be the new utility of the future.