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Monthly Market Outlook April/May 2020

Monthly Market Outlook Article

The COVID-19 crisis has led to a truly unprecedented environment for the global economy, markets, and society as a whole. The flow of news is unrelenting, with significant economic and market-related developments occurring on a daily basis. We cannot be sure when the news on the virus will improve, or whether or not markets could fall further. However, throughout this period, we encourage investors to look through the noise and take a longer-term view. When looking further out, the size of the drop in economic activity and earnings is less important than the length of time it continues for, and how well positioned businesses are for the recovery when it eventually arrives.

As infection data is dependent on the number of people tested, the mortality rate tends to be a more reliable indicator of the spread of the virus. The fall in the latter, suggests that social distancing measures are proving effective, with some countries gradually beginning to ease restrictions. However, for life to return fully to pre-pandemic conditions, an effective treatment or vaccine will be required. Gilead released the results of a significant trial which appeared to show that their drug, Remdesivir. could be used to ease symptoms and speed-up recovery in COVID-19 patients. An Oxford-based lab has also developed a vaccine, which they have begun to test. Whilst there are encouraging signs of progress, even if these treatments prove effective, it is unlikely they will be widely available for some time.

The latest earnings season only partially reflects the impact of shutdown measures, given that lockdowns in many countries were only really enforced towards the end of the quarter. A large number of companies have reduced shareholder remuneration, as well as abandoning guidance for future results, admitting that the uncertainty created by the pandemic is simply too great. The economic numbers continue to be gloomy; in the US, unemployment is close to 15%, and estimates of the damage to Gross Domestic Product vary between -20% and -40% this quarter alone, with many other countries enduring a similar shock. Whilst the economic damage globally has been huge, the measures to support economies have been equally impressive. We have seen phenomenal monetary and fiscal stimulus thus far, totalling in the trillions worldwide, which has gone a long way to support financial markets. Government and central bank action remains targeted at helping businesses survive the crisis, so that economies can again flourish, once lockdowns have been eased.

As sentiment swings between the negative economics and the positive support provided by governments and central banks, we expect the dispersion of returns between sectors, as well as at the individual company level, to remain high. Quality growth equities have outperformed and we believe that companies with strong balance sheets will continue to outperform. We therefore continue to favour a selective approach to investment.

For those looking to add risk at this time, we suggest adding selective exposure to quality growth equities and corporate bonds. Central banks have been buying corporate bonds providing support to the credit market. At the same time, companies' have been cutting share buy-backs and dividends to preserve balance sheets. In the longer term, we are likely to see interest rates remain low for a prolonged period of time, which should support equity markets as earnings recover when we emerge from the restrictions brought about by COVID-19.

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