As at 14 May, the return for LD Discretionary stands at -7.0% year-to-date and +2.0% over a 36-month period. LD Discretionary is the largest investment fund for The Cost-of-Living Allowance Fund. The stock market rose significantly in April as more clarity emerged regarding the spread of Covid-19 and several countries presented plans to reopen their economies. The big question among investors is whether we will see a rapid recovery or face a prolonged recession.
A sense of relief on the stock markets
The Covid-19 pandemic continues to spread globally, whilst several countries in Europe and Asia, which were hit hard early on, are now seeing the spread of the virus slow down. Plans are in place for the gradual reopening of several economies. Governments and central banks have implemented substantial stimulus packages to mitigate the damage caused by the economic lockdown. This is helping to instil greater calm and a positive mood on the stock markets.
Measured in Danish kroner, the global share index has risen by 24 per cent since the end of March, having fallen by almost 35 per cent since February. The fixed-income markets have also stabilised, as central banks have committed to purchasing more government and corporate bonds. Despite the more positive sentiment on the stock markets, there is still uncertainty regarding the outlook for global growth in the coming quarters. Much will depend on the extent to which economies can successfully reopen.
Attempts to reopen in Europe
In the two hardest-hit countries in Europe, as well as in Germany, the number of new cases continues to fall. All three countries are therefore working towards a gradual and cautious reopening of society. The first key economic indicators showing the impact on the eurozone economies have now been published. These suggest that GDP growth fell by more than 3.5% in the first quarter of this year. Furthermore, leading economic indicators are at their lowest level in over 10 years.
The European Central Bank (ECB) is continuing to buy government bonds from eurozone countries. The eurozone countries have launched an economic support package worth 500 billion euros. At the same time, the rift between the northern and southern eurozone countries has widened as a result of disagreement over who should finance the rising public expenditure caused by the Covid-19 pandemic and how this should be done.
Division in the USA
Whilst initially it was primarily the coastal states, New York and California, that were affected by the virus outbreak, the epidemic has gradually spread across the whole of the US. However, the trend in the number of new cases varies greatly from state to state. Politically, there is considerable division over how to handle the crisis. The US President’s handling of the Covid-19 epidemic will inevitably become a key issue in the run-up to the US presidential election this autumn. The debate over reopening is equally difficult in a country as large and business-driven as the US.
It is already clear that the US economy is being hit very hard. GDP growth fell by almost 5 per cent in the first quarter of the year, and up to 30 million people have lost their jobs over the last six weeks. These are historically high figures. Leading indicators and retail sales have also fallen significantly.
The US government has launched massive economic relief packages to help the growing number of unemployed Americans. The US central bank, the Fed, has acted swiftly with extensive purchase programmes for government bonds, corporate bonds and high-yield bonds.
Caution going forward
The massive fiscal and monetary policy responses in the US and Europe have led to significant rises in global equity markets in April. This is despite macroeconomic data and leading indicators pointing to substantial economic costs resulting from society-wide lockdowns. Corporate earnings estimates have therefore fallen considerably over the past few weeks, and investors should remain cautious, as further volatility on the stock markets can be expected over the coming quarters.
