Foster Denovo|News & blogs|News|Market briefing – A change in demand

Market briefing – A change in demand

As widely reported in the media, stock markets have continued to fall, reflecting the new reality of a sharp downturn in economies and a substantial reduction in company profits overall.

The combination of these events has seen equity markets enter a bear market, normally defined as a decline of 20% from their peak value, thus ending the long bull market that has lasted for more than a decade.

Investor confidence has been significantly reduced and we are seeing indiscriminate selling across most markets. This is predominately due to either investor panic, or investors being forced to sell as they seek liquidity. Markets are also adjusting to the possibility that some companies will now be operating at a loss in the short term, as a result of little, or no revenue. This is negatively affecting the company debt, or bond markets, as some companies who have borrowed from the market, to grow their leisure and hospitality business, or to drill for expensive oil, may struggle to repay. As a result, investors are preferring to opt for safe haven government debt, despite the very low returns available.

Measures put in place

Most countries and their Central Banks have put in place programmes to try to ensure adequate credit lines for business to borrow against a temporary downturn and to offset some of the fears. Interest rates have been cut dramatically by the US Federal Reserve and by the Bank of England. The US Federal Reserve, Bank of Japan and the European Central Bank (ECB) have announced more quantitative easing – flooding the financial system with new money.

In summary, we saw:

  • in the UK, the Chancellor announced significant further measures designed to support businesses and households and the Bank of England cut rates almost to zero and announced quantitative easing (QE);
  • in Europe they announced another ECB asset purchase package – the Pandemic Emergency Purchase Program (PEPP); and
  • in the US, there was a Federal Reserve rate cut and QE was restarted in the US; and President Trump signed a large fiscal relief package into law, with progress expected soon on an even larger set of measures.

We are now moving into a phase where governments are announcing payments to households to reduce some of the economic damage the closures are causing. They are looking at schemes to keep people’s incomes up where they are faced with unemployment or a loss of self-employed income. They are also launching or considering schemes to let businesses off tax payments or to inject cash directly into businesses struggling for customer revenue.

Other opportunities

However, as in any previous financial downturn, there will be some winners as well as losers. As trips to restaurants are cancelled, so more food will be sold direct to customers through food shops. As cinemas close, more people will download films and box sets from online entertainment services. As trains and buses lose customers who work from home, the suppliers and service businesses offering laptops, tablets and business connectivity will do well from the new homeworkers. Makers of hand sanitiser gel, cleaning fluids, cold and flu treatments, and the shops that sell them, will also see a surge in demand.

Also, whilst it may not feel like it right now, stock markets last week have quietened down from the original corrections of 12th March. As can be seen from this chart…

Source: Financial Express' FE Analytics
Source: Financial Express’ FE Analytics

…the FTSE All Share was only down 0.38% on the week. No doubt this week will see its share of movements up and down, but history tells us that stock markets do fall…but they also rise.

The importance of context

However, in all of this, it’s also important to remember that headline stock market falls do not mean that investors’ individual portfolios will have fallen by the amounts reported in the media. Most investors are not 100% invested in equities. Most investors will be invested across a wider range of asset classes in addition to equities, usually via multi-asset funds or portfolios. The Investment Association pools multi-asset funds into sectors with the percentage amount indicating the amount invested in equities. As this chart shows…

Source: Financial Express' FE Analytics
Source: Financial Express’ FE Analytics

… the FTSE All-share, invested 100% in equities, has dropped 31.2% over the last month, whereas the collection of 199 multi-asset funds across 78 fund manager groups investing between 20% and 60% in equities, with the balance across other asset types including up to 30% in bonds, has dropped by 16.85% – around a half of the FTSE All Share over the same period. Clearly any drop is not pleasant, but it is essential to remember that when listening to the media’s stock market headlines, numbers quoted should be taken in context with how an individual investor is invested across various asset types.

Continue to keep calm

Going forward, markets are likely to remain volatile and broadly reflect the perceived and real economic costs and degree of uncertainty relating to the pandemic. The situation is very fluid. It is true that the short-term horizon is extremely delicate due to the unpredictability of this situation. However, it is important to remember that we very often have a long-term investment time horizon.

We will continue to monitor the situation and keep you notified of any changes that are made. Please seek professional financial advice if you wish to discuss your financial situation further.

This statement is marketing material. It is for information purposes only and should not be reproduced, copied or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought professional advice concerning the suitability of any investment. Investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.


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