Initially, 2020 was expected to be a positive one after a remarkable 2019. Yet, this optimism soon faded out, with the emergence of the COVID-19 outbreak causing havoc with the world economy. Crucial data and results from major economies and companies are expected to provide numerical evidence of the global pandemic’s effect. Yet with the emergence of positive news related to the pandemic, results registered a rally after reaching a bottom in the last week of March.
As the outbreak spread across the globe, the market’s reaction was unanimous. Starting in late February, trading turned highly volatile, which led the S&P 500 to its steepest drop into a bear market since 1933. By March 23, the plunge had wiped out almost $10 trillion in wealth and ended an 11-year bull run.
The same cannot be said for the last week of March, after the Federal Reserve announced plans to pump trillions of dollars of new money into the markets and Congress passed a $2 trillion economic rescue package. The stimulus, coupled with positive news from health authorities, set off a remarkable rally in both bonds and equity markets.
Stocks also gained amid signs that the outbreak has peaked and some measures could start to be slowly relaxed in the next few weeks. Furthermore, on April 17, results of an early study from a Gilead Sciences drug showed promise with severe coronavirus cases. Sectors such as technology, healthcare and consumer discretionary gained between four to six per cent.
Economic data, including manufacturing, trade and unemployment figures, will be issued in the coming weeks. Unemployment will be in the limelight as economists see whether the number of workers claiming benefits has reached its peak or whether there are signs they are returning to their jobs as state financial aid reaches businesses.
First quarter earnings began to emerge two weeks ago, starting with the major banks. The figures for the quarter were expected to be down by 14.5 per cent; the actual results portrayed a worse picture. The big banks’ results showed they are experiencing a surge in loan losses as the pandemic casts serious doubt on the ability of consumers and companies to repay their debt. In fact, during the first quarter, the six major banks experienced a huge spike in their year-on-year loan loss charges.
Investors should stay away from herd behaviour
Banks are being put to the test as to how they ramp up reserves to deal with anticipated loan problems among their clients. The provisions created by banks are additions to reserves, so they have enough in their rainy day fund to cover future losses. It is now almost certain they will need to revise their loan-loss reserves in the coming quarters.
But the major banks CEOs’ recent earnings conferences did portray a sense of confidence. Banks entered the COVID-19 scene with a well-capitalised balance sheet, while aggressive fiscal and monetary policies of the Federal Reserve and US government aim to facilitate lending with little risk to the banks. But this hasn’t been enough for investors who have sold in the recent rally.
Some of the companies reporting are among those worst hit by the pandemic. They include airlines – major US carriers last week agreed in principle to a $25 billion rescue package. Financial results will be negatively impacted especially in the badly-hit sectors such as tourism and hospitality. But investors may give more weight to the company executives’ words than headline-grabbing numbers, as they seek evidence that corporations can weather the uncertainty caused by the pandemic. So it all boils down to the commentary rather than the companies’ numbers.
It is definitely not easy to be an investor during volatile periods. Probably the anxiety levels of many have sky-rocketed. No one has a crystal ball, so we do not know when we will reach a bottom or when markets will turn volatile. This does not mean investors should cash out or wait for markets to calm. On the other hand, a reassessment of one’s risk might be warranted if, after the last few weeks, investors feel uncomfortable with the way their portfolio fluctuated. Also, investors should stay away from herd behaviour and not necessarily follow what others are doing. Their risk tolerance might be different.
Finally, if investors believe this is an opportune time to participate in the market but they are not prepared to commit large amounts of money, they can start off with small, regular amounts paying off in the long term.
This article was prepared by Julian Mangion, B. Com, ICWIM, investment adviser at Jesmond Mizzi Financial Advisors Ltd. It does not intend to give investment advice and it should not be construed as such. JMFA Ltd is licensed by the MFSA to conduct investment services and is a member of the Malta Stock Exchange and of the Atlas Group. The directors or related parties, including the company and their clients are likely to have an interest in securities mentioned in the article. Past performance is no guide to future performance and the value of investments may go down as well as up. For more information, contact JMFA Ltd of 67, Level 3, South Street, Valletta, on 2122 4410, or e-mail julian.mangion@jesmondmizzi.com.