Equity markets continued to glide higher during May, extending the bounce seen in April. Investors appear to be increasingly encouraged that lockdown regimes in Europe and the US are being eased and the peak of infections has now passed. While the market has risen, there continues to be a significant divergence in companies’ fortunes and share prices. Those business models that can remain operating with only minor disruption or even take advantage of the current situation have seen a speedy return of investor support. Large US tech companies are the primary beneficiaries of this and given their substantial weighting in global equities, and this has helped markets rebound.
Nevertheless, it is astonishing to observe that the US market is now only 10% down from the levels seen before the COVID selloff in February, a level that many believed was already looking overvalued. It is not a dissimilar picture in other major equity markets.
The economic impact is also becoming clearer, with multiple announcements over the month. US employment data is revealing one of the most severe and swift shocks to the jobs market ever, with over 40m Americans filing for unemployment support and the headline unemployment rate breaching 14%. Unfortunately, it is likely to be an underestimate of the actual position. This mirrors the situation in the UK, although the furlough scheme is shielding many of the otherwise unemployed for the time being. Still, some companies are making decisions now to lay off workers, in acknowledgement of the likely weaker demand in the medium term. Economists are expecting the data to get worse before it gets better.
As a result of support schemes as well as a deteriorating economy, the impact on government finances has been severe. The UK government has borrowed over £60bn in April alone, and it is expected that for the fiscal year, it will be £300bn. This is equivalent to around 14% of GDP and will take the debt to GDP ratio to over 100%. While borrowing costs are expected to remain low, such a heavy burden may weigh on the economy for many years to come as future chancellors look to increase revenues and cut spending where possible, in an attempt to reduce this figure. A return to a higher level of inflation may also be looked upon favourably by borrowers as well as central banks, as it will reduce the real value of liabilities.
Looser monetary policy has already been used heavily during this crisis; however, there are still signs of more to come and some policies that were once considered taboo are now being openly discussed. In the UK the possibility of negative interest rates is now being seriously considered, and increasingly central banks are contemplating extending asset purchases more broadly, to include high yield bonds and equities in addition to government and corporate bonds.
While there may indeed be a speedy end to lockdown measures, the damage done to the economy and the speed of any rebound remains highly uncertain. Furthermore, the potential of a second peak and/or a more gradual lifting of restrictions remains a risk. Most management teams are therefore applying significant uncertainty to any forecasts, or withdrawing them altogether.
With such a heavy focus on coronavirus and its impact, otherwise important events may also be going under-reported and underappreciated by investors. The most prominent of these is China-US tensions that had been simmering, and which are now flaring up once more. US accusations towards China over the pandemic and Chinese actions in Hong Kong have meant that it is increasingly likely that relations will sour going forwards. Furthermore, with such a large amount of disruption already occurring, both countries may be willing to take a more aggressive stance than they have before. While this issue may now be small in comparison to the colossal problems caused by Covid-19, it may come increasingly into focus as the world begins to return to normality over the coming months and years.