Surfers have a saying which I think can be applied to markets quite well. It goes “Waves are not measured in feet and inches, they are measured in increments of fear.” Great surfers rely on muscle memory, those repeated processes they have completed hundreds upon hundreds of times. Not all waves are the same but how you ride them using the same techniques. It has been reassuring over the last week as I have been speaking with our portfolio managers to hear they are sticking to their processes and remaining calm. Each portfolios is behaving as we would expect given the level of risk being taken.
Global equity markets saw an increase in volatility last week amid mounting fears of a global pandemic. The MSCI ACWI and the S&P 500 saw the most violent swings, both indices were in positive territory midweek but fell by -1.53% and -1.36% respectively in Sterling terms at market close on Friday. The FTSE All-Share finished the week down -1.77%. In the current environment, investors shifted assets into safe havens such as gold and government bonds.
Slowing global growth continues to be the main concern for markets as the spread of the Coronavirus shows no signs of abating. The OECD and the IMF have revised down their growth figures and the Fed have responded by cutting interest rates between FOMC meetings, which is unusual. The ECB and the Bank of Japan believe they are sufficiently equipped to cope with a financial crisis and are in a position to act.
Unsurprisingly, data continues to show signs of weakening; China’s PMI dropped markedly to 40.3, significantly below estimates of 45.7 and the lowest reading since the survey was launched in 2004. PMI readings below 50 indicate contraction, and while data elsewhere remains reasonably stable, we believe that the impact will start to be felt outside of the Asia region in the coming months with contagion spreading to developed markets.
Moving away from global equity markets to US politics; Biden’s popularity surged in ten Super Tuesday states including Texas last week, reinvigorating his bid to become the Democratic Party candidate. Super Tuesday is the name given to the US presidential primary election day in February and March, when the greatest number of US states hold primary elections.
Biden’s victory sparked the usual derogatory rhetoric from Trump, but we expect the election will be a much closer contest if Trump’s opponent is one with more moderate political views, which, if Biden is victorious over Sanders, would certainly be the case. The real campaigning begins in the summer, which may allow the media to put something else in the headlines and, hopefully, put the Coronavirus to bed.