Market Commentary – March 2020

Markets crash as investors fear global GDP impact of Covid-19

Whilst February saw investors focusing on the disruption to supply chains from China, in March, attention was turned to the economic effect of mass unemployment caused by the compulsory closure of retailers and other face-to-face businesses as countries attempted to slow the spread of the virus. Stock markets around the world saw massive falls, exceeding those seen in the 2008 financial crisis and the 1987 crash and reminiscent of the 1929 stock market crash, followed by the great depression. Investors also experienced almost unprecedented volatility, with intra-day moves of up to 10% being a regular occurrence during the month. The Dow Jones set a new record of almost 3000 points for a one-day fall.

Oil collapses on lack of OPEC/Russia production deal

Having drifted lower on reduced demand, oil prices were hit by a supply-side shock in March, as Russia and OPEC failed to reach a new deal on oil production ahead of the month end. During the month, prices fell as low as $20, as both Russia and Saudi Arabia refused to cut back production. Oil prices at these levels are harmful to both OPEC and Russia, as well as the US shale producers.

Emergency rate cuts support sovereign bonds

Investment grade and government bonds were supported to some degree in March by a series of emergency rate cuts by the Federal Reserve and the Bank of England, aimed at preventing a looming crisis and securing the orderly functioning of the bond markets, where liquidity and price discovery had evaporated. Weaker Sterling saw many of these bonds return a profit for UK investors, although they lost in dollar terms. High yield bonds, conversely, experienced a dire month, with credit spreads on some issues widening to more than 1000 points, as investors took fright over credit default and liquidity risks in the sub-investment grade market.

China appears to buck the negative trend in emerging markets

Emerging markets fell over 15% in March; more than many developed markets. Surprisingly, emerging market bonds fell almost as much as their equity counterparts as low liquidity led to volatile moves in fixed income. China continued to appear relatively stable, with the Shanghai Composite down only 4.5% in CNY-terms, as the virus remained under control and the Chinese economy started to get “back to work”. This stability was somewhat artificial, as the markets were kept closed for an extended period after the Chinese new year. We must also remember that the Chinese market, more than any other, has been subject to government intervention and manipulation.

Markets have seen the largest and fastest destruction of value since the 1929 crash – a fall similar in magnitude to 1987, but in a much more compressed time frame. Here is the story of March 2020 in pictures:

Fears of a liquidity crisis in the markets drove huge volatility, with daily swings of up to 3000 points in the Dow Jones Index, and similar regular moves of c.5-10% in most of the major equity markets. As many countries entered into lockdown, governments and central banks made swift moves to counteract the widespread destruction of corporate earnings and jobs, and markets swung wildly between fear and optimism, reacting to every announcement from world leaders and central banks. In six weeks, the support pledged by governments totalled more than that announced during the two years of the financial crisis in 2008-2009.

As Asian markets showed some signs of being past the worst of the pandemic, and President Trump played down the significance of the disease, Europe took the biggest hit to equities. The virus had already taken a large toll on Italy, and as case numbers began to grow rapidly in other European markets, including the UK, investors began to cut their losses. Hardest hit were transport stocks, retailers and any other companies with a face-to-face business model.

The dollar strengthened considerably in March, as a spike in demand for dollars led to liquidity problems. The yen continued to be the safe haven of choice for nervous investors, whilst the pound fell sharply against the yen, dollar and euro. The series of announcements giving greater and more widespread financial support for businesses and individuals served to undermine the currency, though Britain is widely regarded as being simply earlier than other countries, which will eventually be forced to implement equivalent measures.

The major bond markets generally saw yields contract over the month, as the Federal Reserve and the Bank of England both announced emergency rate cuts and the ECB signalled a return to quantitative easing. The high yield market was severely hit by the perceived increase in liquidity and credit risk, coming primarily from the small and medium-sized energy companies issuing in that space. Credit spreads widened spectacularly to more than 1000 points in some issues (representing a yield of more than 10% above the equivalent government bond), as investors became concerned about heightened risk in sub-investment grade bonds.

*A Generic bond is a theoretical bond that always has the specified tenor, unlike a Benchmark bond, which is a physical bond, with a decreasing tenor.

Disclaimer: The information contained in this report is for illustrative purposes only and should not be construed as a solicitation nor offer, nor recommendation to acquire or dispose of any investment. Specifically the share class used to create the illustrations may not be available on all platforms nor be suitable for individual investors. This report was produced by Independent Strategic Research Limited (ISR) for Affinity Integrated Wealth Management (AIWM) and while AIWM and ISR use reasonable efforts to obtain information from sources which they believe to be reliable, neither AIWM nor ISR make any representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are subject to change without notice. Model returns are calculated using the most appropriate share class of the underlying funds, having regard to the illustrative nature of the report, with all income being reinvested. As a result, real portfolio performance may vary from model performance. Where model portfolio histories are shorter than three years, historic model returns are substituted prior to inception date with returns from an ISR performance benchmark. This benchmark is constructed from the average returns of all ISR portfolios with similar risk profiles that existed during that time. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. Affinity Integrated Wealth Management is a trading style of Buryfield Grange Limited, Buryfield Grange Life Planning Limited and Affinity Integrated Wealth Management Ltd. ‘Buryfield Grange Limited’ is authorised and regulated by The Financial Conduct Authority. Not all services provided by Buryfield Grange are regulated by the Financial Conduct Authority. ‘Buryfield Grange Limited’ is registered in England and Wales at Inspire House, 20 Tonbridge Road, Maidstone, Kent, ME16 8RT. Company registration number 4568338. ISR is registered in England and Wales at 34 Southwark Bridge Road, London, SE1 9EU. Company registration number 09061794. Data Providers: Bloomberg L.P. and ISR.



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