The return for LD Discretionary, which is the largest investment fund for the Cost-of-Living Allowance Fund, stood at -10.8% on 3 April. Over a three-year period, the return stands at -0.3%. The spread of Covid-19 (coronavirus) and the resulting economic consequences are the overriding theme on the stock markets, and this is consequently also affecting returns in all of LD Pensions’ portfolios.
The same pattern in Europe and the US
The highly contagious virus has spread from China to the rest of the world and is now considered a pandemic. It has hit the Western world hardest. Italy, Spain and, most recently, the US have been particularly hard hit. Whilst the number of new cases in Italy and Spain appears to be slowing, the US is now the country in the world where the spread of the virus is most severe. The US and Europe are therefore experiencing the same situation as China did in February, with isolation, social distancing, travel bans and the shutdown of manufacturing facilities and large parts of the public sector.
The stock markets have been heavily affected by the shutdown of large parts of the economy. This has led to sharp falls in share prices and significant day-to-day fluctuations in both the equity and fixed-income markets. Such movements have only been seen a few times in the last 100 years.
The market is reacting in particular to uncertainty about the duration of the lockdowns. The consequences have already been severe for both businesses, which are in desperate need of support, and workers who are losing their jobs. In the US alone, the number of people newly unemployed has risen by around 10 million over the last few weeks, and US unemployment is expected to rise to as high as 15 per cent.
Massive relief packages in both Europe and the US
In order to boost liquidity, support businesses and prevent excessive redundancies at a time when economies have ground to a halt, a number of major economic support packages have been launched in both the US and Europe.
The European Central Bank (ECB) and the US Federal Reserve (Fed) were the first to announce support packages comprising interest rate cuts, bond purchases and more technical measures to ensure liquidity in the markets.
Since then, governments in the US and Europe have followed up with historically large fiscal stimulus packages. In Europe, the focus has been particularly on compensating businesses for wages and lost turnover. In return, businesses have been asked to refrain from making staff redundancies. In the US, Congress managed to agree on a historically large fiscal stimulus package worth 2 trillion dollars, which includes, amongst other things, cash payouts to all Americans and an extension of unemployment benefits. These relief packages are a positive step, but further measures are likely to be needed both in Europe and, in particular, in the US.
The willingness of governments and central banks to roll out such large-scale support packages has had a short-term positive effect on the stock markets. Time will tell whether this is also enough to alleviate the worst of the panic on the stock market on a more lasting basis. Historical experience suggests that the stock market will return to normal, but it is still uncertain whether this will take months, half a year or even longer.
The future outlook is uncertain
The question is when governments will dare to reopen society, at what pace this should be done, and what the reaction will be should there be a second wave of infections this autumn. In this context, the development of treatments for severe symptoms or a vaccine against COVID-19 would be a crucial and positive factor for the stock markets.
In LD Pensions, there remains a risk of further price falls in the short term due to considerable uncertainty regarding the spread of the virus. Developments in the US are particularly worrying. For share prices to stabilise, the anticipated reopening of the economies in Europe and the US will need to take place without any new outbreaks or spread of COVID-19.
