Market Analysis Apr 2020

Despite negative economic indicators signaling a surge in unemployment, US shares witnessed their most robust monthly rally in three decades. This remarkable performance occurred against the backdrop of unprecedented unemployment figures, with over 20 million initial jobless claims filed during April alone and a cumulative tally surpassing 30 million since the onset of the pandemic. Concurrently, the US GDP contracted by 4.8% in Q1, and further substantial decline, approximately 22%, was anticipated for Q2, as predicted by Schroders' economics team.

Amidst this challenging economic environment, the S&P 500 Index marked its strongest monthly rebound in 30 years during April. This resurgence was attributed to substantial stimulus measures and gradual relaxation of lockdown restrictions in select states and parts of Europe. While sectors like materials and energy, which had experienced significant declines in the previous quarter, made remarkable gains, financials and industrials, which also endured substantial setbacks in Q1, displayed a more cautious recovery due to lingering uncertainties regarding the impact of Covid-19. However, sectors like utilities and consumer staples exhibited relatively muted performance compared to the broader index.

Eurozone equities embarked on a recovery trajectory after a steep downturn in the preceding quarter. The MSCI EMU Index reported a return of 6.5%. Despite ongoing lockdown measures in several European nations, investor sentiment shifted beyond the immediate crisis phase. Throughout April, various countries outlined strategies for restarting economic activities, with the prospect of vaccine progress instilling confidence in the stock markets.

Excluding the energy sector, which registered negative returns due to persistent pressure on oil prices arising from reduced demand and oversupply, all other sectors posted positive gains. Healthcare and information technology emerged as the top-performing sectors, while industries such as transportation, automobiles, and components—previously plagued by significant declines in Q1—also rebounded strongly.

Preliminary data indicated a 3.8% quarter-on-quarter contraction in the eurozone's economic growth during the first three months of 2020, largely attributed to the widespread introduction of Covid-19 containment measures in March. April witnessed inflation estimates of 0.4%, down from 0.7% in March. The flash composite purchasing managers' index (PMI), which gauges business activity, plummeted to a record low of 13.5 in April from 29.7 in March. This PMI surveys both the manufacturing and services sectors, with readings above 50 indicating expansion and below 50 indicating contraction.

April saw a rebound in UK equities, with smaller and mid-cap stocks spearheading the recovery, reversing some of the underperformance experienced in March due to Covid-19-related lockdown measures. However, larger companies, particularly those in the oil and gas sector, lagged behind as Royal Dutch Shell's announcement of its first dividend cut since World War II due to diminished crude oil prices had an impact.

The Office for Budget Responsibility (OBR) conducted an assessment of Covid-19's potential impact on the UK economy and public finances, predicting a 35% decline in Q2 output if the lockdown were to persist throughout the quarter. Consequently, the OBR estimated that government borrowing could surge to around 14% of GDP due to these factors and policy interventions.

Although the flash IHS Markit/CIPS composite purchasing managers' index indicated a considerable reduction in activity during April, plummeting to 12.9 from March's 36.0, UK Prime Minister Boris Johnson's return to work following hospitalization for Covid-19 and his assertion that the country had surpassed the crisis's peak buoyed sentiment. As the month drew to a close, the government commenced planning for easing lockdown restrictions and reviving the economy.

The Japanese market experienced substantial volatility in early April before transitioning into a more stabilized trading pattern, culminating in a positive total return of 4.3% for the period. The yen displayed reduced volatility and gradually appreciated against the US dollar. Market dynamics were primarily influenced by global evidence suggesting a peak in Covid-19 cases, as opposed to specific developments within Japan. Stocks sensitive to economic fluctuations outperformed, while domestically-focused stocks faced greater challenges. Airlines were particularly impacted due to concerns surrounding their ability to reestablish profitable services in the medium term. Smaller companies gradually recuperated from their initial losses over the latter half of the month.

Japan declared a state of emergency across multiple prefectures, including Tokyo, amidst a distinct trajectory of Covid-19 cases and mortality compared to other developed nations. Nevertheless, the practical restrictions on social and business activities in Japan were less stringent than those observed in Europe. March's economic data was generally less bleak than anticipated, and forward-looking PMI surveys indicated that Japan's economic repercussions were relatively milder compared to Europe and the US.

The Japanese government continued to augment its fiscal response to the crisis, replacing the initial proposal for support payments to affected individuals with a simplified one-time payment of ¥100,000 for all residents. Asia ex Japan equities rallied during April due to substantial central bank stimulus initiatives and indications of Covid-19 case stabilization in the US and Europe. Among the index constituents, Pakistan and India delivered the strongest performance, while China exhibited a slower pace of recovery after its remarkable outperformance in March.

Throughout April, government bond yields generally declined, although regional variations were observed. A surge in investor confidence prompted a vigorous recovery in riskier assets. This optimistic sentiment persisted from late March and was bolstered by central bank policy pronouncements, such as the Fed's expansion of corporate bond acquisitions.

Nevertheless, certain regional disparities could be attributed to divergent policy responses. The US 10-year Treasury yield receded by three basis points to 0.64% during the month, lagging behind Germany and the UK, both of which had experienced substantial declines in March. While the Fed began scaling back its weekly purchases of Treasuries during the latter half of April, it retained its policy support.

In Europe, the German 10-year yield diminished from -0.47% to -0.59%. In contrast, Italy's 10-year yield increased from 1.52% to 1.76%, emerging as a notable laggard. Despite the region's gradual progress towards a more coordinated response, the ECB unveiled supplementary support measures through its lending operations and pledged to escalate asset acquisitions as needed.

Corporate bonds outperformed government bonds, with investment grade bonds delivering their most robust monthly total return on record at 4.6%. The spread of investment grade bonds tightened by 73 basis points. Additionally, global high yield bonds posted their second-highest total return on record at 4.5%, largely driven by the energy sector in the US.

Emerging market debt demonstrated positive returns, with corporate bonds performing well and EM currencies making gains. Among the rebounding currencies were the Indonesian rupiah and Russian ruble.

Convertible bonds, as measured by the Thomson Reuters Global Focus index, benefited from the robust recovery in global stock markets, achieving a 6.2% increase in April. While US and European convertibles experienced marginal valuation increases, discounts could be found in Japanese and Asian convertibles.