Coronavirus, oil shock, recession – investor sentiment “collapses”

Investor sentiment has “collapsed” on the back of the coronavirus outbreak, oil shock, recession fears, and surging debt default risk, according to a report by the Bank of America.

The market has found itself in a state of extreme bear positioning coinciding with policy panic to offset a recession, while global growth expectations have dropped to their lowest since the bank began its Bull & Bear Indicator survey in 1994.

As the FTSE 100 tumbled once again on Wednesday, the pound sterling sunk to its lowest level since 1985.

According to Ian Simm, founder and chief executive of Impax Asset Management, the declaration of the coronavirus as a global pandemic will likely lead to an aggressive slowdown in economic activity during the coming weeks and months.

“The collapse in oil prices and further travel restrictions have also triggered concerns over a potential wave of bankruptcies in the energy, transportation and leisure sectors” he said.

“Cancellations of events worldwide and new initiatives to encourage social distancing have made it more difficult to assess when economic activity might bottom, creating uncertainty for individual securities and asset values.”

Economic growth is likely to contract due to significantly lower consumption. “The length of this contraction is hard to predict at this point and depends on how the virus evolves and the impact of the monetary fiscal responses from central banks and policy makers,” said Simm.

In the UK, the government has said it will do “whatever it takes” to combat the volatility set off by the Covid-19 pandemic.

The country’s chancellor has announced an emergency fiscal stimulus including a £330 billion loan guarantee package – yet the economy faces “exceptional shock” as measures to stem the spread of the virus are put in place, according to Axa Investment Managers’ head of macro research David Page.

“The aim [of the stimulus] is to help companies afford and maintain capacity so that as demand recovers beyond the impending virus-induced drop, firms are well placed to benefit from the rise in demand. This is hoped to mitigate job losses, which would otherwise exacerbate and prolong a period of subdued demand,” he said.

However, market commentator and chief executive of deVere, Nigel Green, warned the UK’s economic response to the coronavirus might need a “rethink”.

“There are concerns that the fiscal stimulus they have offered might not be enough.  This is evidenced by spooked stock markets sinking as investors fear the measures are not adequate,” he said.

“There are serious questions. Can they get it into the hands of individuals and companies quick enough? Is the system too political to get these measures to the people that matter most and fast enough?”

As global markets continue to suffer, the Bank of America said, in light of the scale and impact of the current unprecedented health crisis, “sustained rally requires further macro and market policy moves, plus the belief that the virus is peaking in Europe and the US”.

A survey by Natixis Investment Managers found that political risk in the UK set against the global backdrop has led to UK financial advisers cutting their domestic exposure amidst the uncertainty.

Analysis of more than 50 model portfolios in the UK found that advisers transferred almost 16% of their allocations out of the UK and to global markets in order to diversify and hedge against the ongoing macro-economic risks including Brexit and geopolitical uncertainty.

James Beaumont, international head of multi-asset portfolio management at the firm, said: “The coronavirus has knocked the momentum out of the positive market sentiment that started in Q4 2019 and carried into January 2020.”

“The dramatic volatility at the end of February and beginning of March has caused clients to completely re-evaluate their portfolios to adequately shelter themselves from downside risk. Market uncertainty is far from over and may even intensify over the coming months as the virus spreads,” he added.

© 2020 funds europe



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