Our Opinion: 2020

Market Update : 23rd April 2020

Stocks regained ground yesterday (Wednesday) following a sell-off earlier this week on worries over dislocations in the oil market. The S&P 500 ended the day up 2.3% and the Euro Stoxx 50 up 1.6%. There was also a more positive mood in credit markets.

There were several catalysts for the improvement in market sentiment:

Firstly, stabilization in the oil markets: Data released yesterday showed that US oil inventories have continued to build, meaning that the large glut of oil is not likely to be cleared until the second half of the year. But crude prices were given some support from a threat by US President Donald Trump to “shoot down and destroy any and all Iranian gunboats if they harass [US] ships at sea.” It is likely that, while oil prices will remain volatile, they will recover in the second half of the year as major nations lift travel restrictions, and as production and capital spending fall among oil producers.

Secondly, COVID-19 policy support.  The US Senate passed a new $484 billion COVID-19 relief package late Tuesday, expected to be approved by the House and signed into law today. The legislation includes important measures to limit the rise in unemployment and bankruptcies resulting from restrictions, including $310 billion for the Paycheck Protection Program, which aims to encourage small businesses to keep staff on the payroll. Meanwhile, European leaders are expected to support various rescue efforts, with some member states proposing €2 trillion of economic assistance measures. While measures are likely to be delivered only slowly, and proposals for joint bond issuance to be rebuffed, a further package of initiatives will likely assist in bolstering confidence.

There has also been movement on the (start of some form of) economic normalization. President Trump praised moves by some US states to relax restrictions, tweeting: “States are safely coming back. Our country is starting to open for business again.” Treasury Secretary Steven Mnuchin said that he expects “most of the economy, if not all of the economy, open” by the end of August. Meanwhile, Italian Prime Minister Giuseppe Conte said his government will present a plan to ease the lockdown from 4 May.

The equity market is likely to be remain extremely volatile with and only defensive and selective strategies are likely to be appropriate for gaining equity exposure. In particular, strategies should focus on resilient stocks in less cyclical sectors. Stocks likely to be best positioned to benefit from structural transformations resulting from the current crisis. These include ideas in automation and robotics, e-commerce, fintech, food, and healthcare industries.

23rd April 2020