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Experts' stock market views – how did we get here and how do we get out?

We've come to the end of a decade of rising stock markets. We look at how governments could step in.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

It’s only March, and yet already it feels as if we have had a whole market cycle since Christmas.

Just a couple of months ago, UK investors were buoyant. The morning after December’s election, Boris Johnson stood beaming at London’s Queen Elizabeth II Centre following a resounding victory over Jeremy Corbyn.

He promised big spending on the NHS, infrastructure, education, innovation and technology. And of course, to “get Brexit done”. The stock market, freed from the shackles of political uncertainty, and the threat of Corbyn’s railways and utilities nationalisations, bounced, as investors snapped up UK shares.

And it wasn’t just the stock market that was feeling rosy about the outlook for 2020. The Lloyds Bank Commercial Banking Business Barometer, which measures the views of 1,200 companies on their prospects and optimism about the UK economy, hit a 14 month high in January. Presidents Donald Trump and Xi Jinping were even finding common ground, signalling a potential pause in the US-China trade war, at least until Trump ran for re-election later this year.

Investor sentiment was high too – our own Investor Confidence survey revealed a climb in sentiment towards domestic stocks, up 18 points from 85 to 103 in January, the highest level since November 2015. This optimism was carried through to Asia Pacific and emerging markets, which climbed yet higher in the January survey – as did sentiment towards US stocks, potentially off the back of a thawing in the trade war.

And then disaster struck. The emergence of coronavirus, or COVID-19, has blown the stock market off-course, as concerns about the economic and corporate impact of millions of people across the globe in lockdown have grown.

Overdue a downturn?

While the cause of the stock market rout was unexpected, the thought that some assets had become overvalued had been on some investors’ horizons long before the first cases of coronavirus began to be reported.

The fund managers at Troy for example, have been cautious on the outlook for some time, and say that while the extent of the shock is as yet unknown, it comes at a time when global stock markets were already highly valued relative to their histories, and the global business cycle increasingly protracted.

Central banks’ policies since the financial crisis of 2008 have led to an enormous expansion in the global monetary base, pushing asset prices higher and grossly distorting the cost of capital for businesses and sovereigns around the world, the managers say. They question how effective central bank intervention can be, now we’re experiencing a more serious threat to economic growth.

It is difficult to argue with their position that certain equity markets were looking stretched.

It has been a decade-long bull market for global equities, led by US stocks. While we may have had some headwinds thanks to Brexit uncertainty here in the UK, across the pond the S&P 500 has been consistently hitting record highs.

From the global financial crisis lows, the S&P 500 more than quadrupled its value, from 768 in March 2009 to 3,330 in February this year. Most forecasts were in agreement that the next decade would not be as fruitful. As we know, past performance isn’t a guide to the future.

The CAPE ratio, a valuation measure which can be used to predict returns, suggested that the S&P 500 was only going to deliver an average of 2% to 3% a year over the following 10 years. Many other equity markets across the world were fair to overvalued on historical averages.

Now, a lot of that heat has been taken out of the market. The trigger may have been unexpected, and it may be hard to stomach the volatility, but this re-rating may present a buying opportunity. Of course, as always there are no guarantees, all investments can fall as well as rise in value so investors can make a loss.

For those fund managers already fully invested in equities, there is a renewed focus on investment goals – as there should be for retail investors too.

Artemis Income fund manager Adrian Frost and team, value the stocks in their portfolio not for their short-term prospects – but for the next five years and beyond. Frost comments that current events, although seemingly seismic, have not materially altered the team’s longer-term outlook.

Troy – cautious on the equity outlook until now – entered the current turmoil with equity allocations near multi-year lows. But they have used the downturn to increase their allocation to equities from a historically low level.

As for what comes next, the managers align with our views, saying that investors should think and plan for the long term, adding – like all crises, this too, will pass.

How do markets recover from this downturn?

Mark Dampier, Head of Research.

I have seen more than my fair share of tumbling markets, and each time, it has felt like all hope was lost. Us older investors had to survive a ghastly late 80s recession when interest rates stayed at 15% for a whole year. A Gulf war, Dot Com crash, the market fallout from the devastating events of 9/11 and the global financial crisis of 2008. All of these caused huge market dislocations – there were others too. Now we are the midst of another market fall. I have no experience in the virus that has brought the long bull market to a very abrupt end, although I have medical friends who have been much in demand. We need facts, not fake news, at this time.

So let’s look at what we know.

This is a huge supply and demand shock to economies across the globe.

Supply has been disrupted because businesses in lockdown can’t supply goods and today’s economies rely on long supply chains, often not located in their own countries.

It’s a huge demand shock too, as consumers in lockdown will, by its very nature, consume much less, and modern economies are heavily reliant on consumption.

So the crux of the problem is simple – this is a crisis that only governments can fix. You can lockdown an economy for a few weeks, and while it will be painful most businesses and individuals will take a hit, and most will come out okay. But you can’t disrupt supply and demand for long if you want businesses to survive and economies to function. From airlines to small restaurants, all companies, regardless of number of employees, or sector, or global footprint, face bankruptcy if there is no revenue.

So governments globally have to step up – cutting interest rates won’t get consumers spending if they can’t leave their homes. There needs to be more of what we have begun to see – a huge fiscal package which will support individuals with real cash, and support companies from large to small with cashflow so that when demand recovers there are businesses left to meet it.

A firebreak that only governments can implement needs to happen very soon. Now that might be a sign to call the bottom of the market.

This article is not personal advice. If unsure, please seek advice.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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