Assets returns so far this year

10 August 2020

One of the more remarkable features of the COVID-19 crisis has been the yawning gap between collapsing economic activity and rising equity markets. Investors had a torrid start to the year with the pandemic driving down risk assets and global equities by almost a third between by 23 March. But since then equities have staged a remarkable comeback and the global market is now down by just 1% so far this year.

Investors seem to have decided that, despite the collapse on growth, extraordinary monetary and fiscal will, eventually, save the day.

In the developed world, equity prices have, to varying degrees, mirrored national progress in the management of the COVID-19 pandemic. Danish stocks have been the best performers, benefiting from an efficient response to the virus, and are up 11% this year. South Korean and Swedish stocks are up 7% and 4%, respectively.

Despite the seriousness of the pandemic in the US its equity market has done better than most, returning 5% this year. This outperformance reflects, in part, the outsize contribution of technology stocks to the US index. The boom in remote working, online retail and all things digital has made tech stocks the darlings of investors.

Equities in other developed markets have yet to recover their earlier losses. Greek and Spanish equities are the worst performers in Europe, down 27% and 21%, respectively, partly reflecting the disruption to the tourist sector which make such a contribution to both economies. Despite a strong rally since March, UK stock prices are still 17% below their levels at the beginning of the year.

Shares in businesses in the travel and leisure and oil and gas sectors have suffered large declines. Banks have been even worse hit on concerns about the impact of low or negative interest rates and of corporate insolvencies on bank margins. UK bank shares have fallen 45% since the start of the year.

Among the ‘FAANG’ technology stocks – Facebook, Amazon, Apple, Netflix and Google – Amazon is the best performer returning 73% this year. Netflix has seen a sharp rise in subscriptions over the lockdown period, returning 55%. Apple, which reported a pandemic-defying rise in second-quarter sales, also returned 50%. But none of these match the performance of teleconferencing company Zoom, whose share price has quadrupled this year.

Pharmaceutical and biotech stocks have also done well, especially companies that have made progress on COVID-19 vaccines. Shares in Astrazeneca, which is working on the Oxford University vaccine, have returned 14%. That is overshadowed by the returns from small biotech companies, such as Moderna and Inovio, with promising vaccine programmes. Inovio’s share price has seen a six-fold rise this year. Moderna’s has almost quadrupled.

China was first into and out of the pandemic. Chinese equities have done well, returning 12%. But elsewhere emerging market stocks have seen significant losses on concerns about the impact of the pandemic.

Shrinking activity and pervasive uncertainty have hit commodities. The S&P/Goldman Sachs commodities index is down by almost a third this year, in large part because of the collapse in the oil price. Industrial metals have recovered their losses and are up 1% this year.

Elevated uncertainty has boosted ‘safe-haven’ assets, especially precious metals. Gold, which hit a record high last week, is up 33%. Silver prices have soared too and the supposedly safe yen and Swiss franc have made gains. After initial gains in March the dollar has lost ground as the scale of the pandemic and the damage to the US economy have become apparent. The euro has been the best performer among major currencies and has risen 6% so far this year.

Among alternative investments, Bitcoin has risen by 64% since January. Investors seem to be treating it as a better store of value than many traditional safe-haven assets.

The desire for safe assets can also be seen in the government bond market, with US and UK bonds delivering returns of 10% this year, well above the gains to equities or corporate bonds.

For some higher income households the lockdown has raised levels of savings. Some of this cash seems to be finding its way into the market for high-end goods and collectibles. In May, Sotheby’s auctioned a pair of Michael Jordan’s old Nike Air Jordan 1s for $560,000, a record price for second-hand trainers. Christie’s recently sold Roy Lichtenstein’s “Nude with Joyous Painting” at $40.5m, well above the estimate. Agents report a rise in luxury boat sales and growing demand for country retreats. Online sales have supported fine wine prices, with the Liv-ex index of the 100 most sought-after fine wines down by just 2% this year. Luxury brands such as Chanel and Louis Vuitton have also raised the prices of some handbags by as much as 25%.

Supported by a stamp duty holiday and pent-up demand, UK house prices have, according to the Nationwide, recouped earlier losses and are back to January levels. The pandemic seems to have boosted demand in desirable rural ideas. Property listing site Rightmove has reported that the number of city residents contacting estate agents to buy a home in a village has more than doubled this summer.

Buoyed by easy money and fiscal expansion risk assets have rallied into one of the deepest downturns on record. Out in the real world the talk is of second waves of the virus and of unemployment, insolvencies and uncertainty. Whether risk assets continue to make gains in such an environment depend on policy and the effective management of the virus.

For the latest charts and data on health and economics, visit our COVID-19 Economics Monitor:

https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

OUR REVIEW OF LAST WEEK’S NEWS

The UK FTSE 100 equity index ended the week up 2.3% at 6,032 in a continuation of volatility seen in recent months.

COVID-19

Numbers of new confirmed cases are rising very sharply in Spain and quickly in France and Japan. New cases in the UK, Germany and the Netherlands have also grown at a slower pace
Confirmed cases are falling in the US, with the seven-day rolling average of new cases falling to 55,500 on 7 August from 67,400 on 23 July
Total confirmed cases in Africa surpassed one million although the true number is likely far higher
Aberdeen and Preston became the latest UK cities to be subject to local lockdown restrictions following a rise in the number of local cases
The UK expanded quarantine restrictions to include travellers returning from Belgium, Andorra and the Bahamas
UK children’s commissioner Anne Longfield called for pubs and restaurants to close before schools in any future lockdown
Melbourne tightened its lockdown, closing non-essential businesses and imposing a curfew, following rising numbers of cases in the city
Authorities have reimposed a lockdown in Manila amid fears that the health system is at risk of being overwhelmed

Economic developments

The Bank of England has become less pessimistic about the short-term impact of COVID-19, revising its forecast for Q2 UK GDP from a contraction of 28% to a decline of 20%. However, the Bank does not expect output to return to pre-pandemic levels until the end of next year
UK unemployment is forecast to peak at 7.5% in Q4 by the Bank of England, up from a rate of 3.9% in the most recent data
The US unemployment rate fell from 11.1% to 10.2% in July as the US economy added jobs
Orders for German-produced goods rose almost 28% in June
Retail sales in the eurozone rose 5.7% in June and are now above levels seen in the same month last year
Online sales in the eurozone fell 6.8% after four months of growth, suggesting a return to bricks-and-mortar retail stores
Household spending in Japan rose 13% in June
A large explosion in Beirut, Lebanon caused widespread death, injury and damage. Around 300,000 were left homeless

Policy response

US president Donald Trump signed executive orders to partially renew unemployment benefits and cut taxes to stimulate activity
Mr Trump’s unilateral actions follow deadlocked negotiations between Republicans, and Democrats who favoured a larger stimulus package
The Bank of England opted to keep interest rates on hold on 0.1% and did not announce any changes to their asset purchase programme
A novel policy to support the hospitality industry – "Eat out to help out" – launched last week offering UK consumers up to £10 off restaurant bills

Business news

BP announced plans to reduce oil and gas production by 40% by 2030 as it shifts investment into renewable energy
Short-haul airline Easyjet is planning to operate 40% of its capacity in the three months to September – up from earlier forecasts of 30% – as demand returned faster than expected
Walt Disney Studios opted to release its new film "Mulan" on streaming platform Disney+ to the displeasure of UK cinema operators
Airline Virgin Atlantic filed for bankruptcy protection in the US
Twitter froze the campaign account of US president Donald Trump following “violation of the Twitter rules on COVID-19 misinformation”

Politics

The US imposed sanctions on Hong Kong chief executive Carrie Lam and other officials over the controversial national-security law imposed by Beijing
US president Donald Trump issued executive orders which will ban US entities from engaging in any transaction with the Chinese owners of mobile apps WeChat and TikTok
Microsoft is negotiating to buy the global business of video-sharing app TikTok in the grace period before the order takes effect
The US imposed tariffs on imports of aluminium from Canada on national security grounds. Canada responded with retaliatory tariffs
The United Arab Emirates opened the first nuclear power plant in the Arab world

Saudi Arabian crown prince Mohammed bin Salman has been accused of sending assassins to Canada to kill a former Saudi intelligence officer

And finally… the US National Park Service has asked people not to “push down a slower friend” in order to escape from a bear. They noted this advice should be followed “even if you think the friendship has run its course” – un-bear-able behaviour

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