The panic and sell-offs across equity markets triggered by the coronavirus have in more recent weeks been replaced by handsome price rises. In the US, the S&P 500 index is up more than 25% from its March low, and we have in fact experienced a week with the largest equity price increases since 1938. In Europe too, equities are up by close to 20% on the European Stoxx 600 index.
“However, the pronounced rebound in prices after the sharp falls was perhaps expected. Going forward, the path is more difficult and will likely require significant progress in terms of the coronavirus and the economy before we see further significant price increases,” says Danske Bank’s chief strategist, Henrik Drusebjerg.
Despite the recent increases, equity prices remain far below their February peaks, with global equities (MSCI AC World) still down roughly 17%.
How has the corona crisis affected the financial markets over Easter?
“Progress has been made in the past week. Most importantly, the coronavirus outbreak appears to have peaked in several European countries, while we are presumably close to a peak in the US. Positive health data are an essential prerequisite for a gradual reopening of the world’s economies.
“The past week also brought us a couple of items on our wish list: namely, the outline of a major EU economic assistance package to ease European economies and companies through the corona crisis, plus a string of oil producing nations (OPEC+) have agreed to cut oil production.
“The massive drop in oil prices further spurred investor jitters and price falls across the financial markets. And while the agreed daily production cut of around 10 million barrels of oil is probably not enough to boost oil prices to any significant extent, it can provide a safety net under the market – including the hard-pressed market for corporate bonds issued by oil companies. Moreover, in the short term at least, the agreement probably reduces the risk of a further price war between Russia and Saudi Arabia, which triggered very substantial falls in oil prices in March.”
What will be the key indicators for the financial markets in the coming week?
“Top priority will be further positive developments in the corona figures, especially as a number of countries are now beginning to unveil how they will get their economies up and running again. Of particular interest here will be what Donald Trump adds about the re-opening of the US economy.
“The Q1 earnings season has just kicked off in the US. It won’t be pretty, but no-one is expecting that. What companies say about the future should be of particular interest, even though what they can say at this point is probably rather limited. Investors are still fumbling in the dark somewhat at the moment, as we do not know how long the lockdown of the global economy will last, or how quickly economies can be re-opened. Hence, it is difficult to assess whether or not the equity price falls seen so far reasonably reflect the decline in earnings that companies will likely experience.
“Finally, we will be keeping a close eye on data from China to see how its economy picks up after the coronavirus. This could give some indication of what we might expect in other parts of the world – and newly released Chinese export figures were better than expected.”
What are your expectations for the economy and equity markets in the slightly longer term?
“We still expect to see a pick-up in economic activity in the second half of the year, though the process will of course be gradual. The major economic assistance packages, low interest rates and subdued oil prices provide a very strong foundation for economic growth, and we expect a reasonable single-digit return from equities over 12 months. But naturally this will be a time of volatility and uncertainty, with investors concerned about another potential coronavirus outbreak later in the year and how this might be tackled.
“We generally recommend that investors hold onto their investments if they fit the investor’s investment profile – including risk appetite and investment horizon.”