Investment market update: May 2020

Whilst investment markets have settled a little from the severe bouts of volatility seen a few months ago, the impact of Covid-19 continues to weigh on economic and business prospects. The next few months, as restrictions are lifted and government support begins to withdraw will be crucial and give an indication of how economies will fare in the short and medium-term.

UK

The full impact of coronavirus on the economy remains unknown. However, the lockdown and ongoing restrictions will undoubtedly have an impact. The Bank of England predicts the UK economy will shrink by 14% this year. However, it added banks are strong enough to handle this and will be able to continue lending.

During May, the government announced it was easing lockdown restrictions, allowing some businesses, including retailers, to prepare to open in June. The furlough scheme, which figures from the Office for National Statistics indicated two-thirds of firms have taken advantage of, has also been extended until October.

Unsurprisingly, economic activity has slowed considerably over the last couple of months:

• Official figures show UK GDP shrank by 2% between January and March, just as the pandemic was beginning to take hold
• UK private sector output fell to record lows, with data going back to 1998. The composite PMI index fell to 13.8 in April, with a reading below 50 indicating contraction
• CBI’s measure of factory output suggests volumes are down 54% in the last quarter, with 84% of respondents stating they have seen a negative impact on their domestic output.

In a sign that consumer confidence is falling and an economic downturn is weighing on decisions, the Bank of England reported that credit growth and mortgage approvals are at their lowest point since 2013. Credit card lending fell for the first time on record, with records going back to 1987.

Europe

In a similar picture to the UK, Christine Lagarde, President of the European Central Bank, expects the eurozone economy to shrink by 8-12% in 2020. GDP across the currency area fell 3.8% in the first quarter of 2020.

The eurozone PMI did improve in May, rising to 30.5 compared to the record low of 13.6 in April. As the figure is still below 50, it indicates a contraction but could suggest that businesses are getting back on their feet as lockdown restrictions started to lift across Europe.

The EU has also unveiled its recovery fund which is accessible to all EU member states, which could go some way to offer confidence to businesses operating during these uncertain times as well as investors. The fund totals €750 billion and includes a €560 billion recover and resilience facility and a new health programme to prepare for future health crises.

US

Mimicking what we’ve seen in Europe, US GDP fell by 5% in the first quarter and Jerome Powell, Chair of the Federal Reserve, warned the US faced a ‘prolonged recession’.

Data released in May shows that US factory orders have suffered a 10.3% slump, with PMI data for the manufacturing sector falling to 41.5 in March. Even more worrying is the PMI April figure for the US construction sector falling to just 8.2. The lower level of activity has affected unemployment rates. The private sector suffered record job losses, with 20.5 million Americans losing their job in April.

Causing concern among investors is also the risk of a trade war igniting between the US and China again. In January, a preliminary trade deal was signed suggesting an agreement could be reached between the two nations. However, President Donald Trump has since called for tariffs as the ‘ultimate punishment’ for the handling of the coronavirus pandemic, dashing investors’ hopes.

Asia

Data from Hong Kong has highlighted the impact of coronavirus in the region. The economy shrank by 5.3% in 2020, however, last year’s pro-democracy protests and the US-China trade war will also of had an impact.

As always, it’s important to consider your long-term financial plans and goals when investing. Whilst the market may be experiencing some volatility and economic downturn, focusing on the bigger picture is crucial.

If you have any questions at all about your investments, please get in touch.