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Hedley Market Commentary - March 2020

Market Commentary – March 2020


By Neil Worsley, Investment Strategist


With the Coronavirus making a sudden and dramatic impact on financial markets, commentators have been split about how to handle the decline, with some suggesting steering clear of stocks for now and others saying it’s not a bad time to buy, selectively.


The last week of February saw stock markets across the globe suffer their worst performances since the 2008 financial crisis as the fast-spreading Coronavirus stoked fears of a prolonged global economic slowdown which drove investors out of risk assets. While the number of cases is still relatively small, at a global level, the impact of reduced economic activity is now beginning to filter into the market.


China, the source of the outbreak, saw factory activity contract at the fastest pace ever in February, even worse than during the global financial crisis, highlighting the enormous damage already being done to the world’s second-biggest economy.


Analysts are already warning that the spread of the virus to other countries and the ongoing ‘lockdown’ of much of the Chinese economy will impact supply chains which will, in turn, have a substantial impact on economic growth rates. In addition, consumers are likely to rein in expenditure on social activities which can only add to any economic deterioration.


The Organisation for Economic Co-operation and Development (OECD) is warning that growth will sink to levels not seen in more than a decade, but some investors are hopeful that central banks will ride to the rescue and take decisive policy action to limit the pain.


However, while action on monetary policy is highly likely, there are very few levers remaining which central banks can take to alter the landscape in any dramatic way, after all, much of Europe already lives under negative interest rates as does Japan, with quantitative easing programmes still ongoing. Comforting words will no doubt be forthcoming but it is difficult to see how these can be translated into decisive or meaningful actions which could have much bearing on the economy.


However, while the Coronavirus and economic news flow will undoubtedly continue to be negative in the short term, stock markets are a discounting mechanism and the falls in share prices which we have already witnessed are already suggesting an economic slowdown is highly likely. If we look at the significant market corrections which have occurred previously (graph below), the markets decline usually lasts, on average, around 4 months before we then begin the recovery process, unless of course, this is the precursor to a prolonged recession.



Of course, no one knows how this particular epidemic will unravel and it is not just a straightforward economic deterioration we are witnessing, which makes this far more difficult to quantify. However, although the volatility in equity markets is likely to remain for a while yet and further equity price falls are likely, this does not mean that we are about to witness another financial crisis.


While cash is king for the moment, there will certainly be buying opportunities over coming weeks for long term investors, especially with equity market yields significantly outstripping cash and most company dividends reasonably secure.


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