The strong rally in equities that began on 24 March continued through the week as the number of COVID-19 deaths in Spain and Italy appeared to slow, and as investors sought to invest in global equity markets that are today some 22.4% off their highs reached in February (UK world index, US dollars). The same index rose 6.3% over the week, led by Germany up 8.5% (Dax Index), the US up 7.6%(S&P Composite) and the UK up 4.6% (UK top 100 companies). Smaller companies fared better across all markets, rising 7.0% in the UK (UK top 250 shares) and 7.5% in the US (S&P 400 MidCap).
With the US, Europe and UK closed on Easter Friday, and Europe and the UK closed for Easter Monday, traders are likely to take risk off the table. Next week will also see the start of the quarterly reporting season in the US which will be keenly watched and widely expected to be the first of two bad quarters of corporate news. While the fall was characterised by panic and a general sell off this news flow will be have a more stock and sector specific impact.
We started the year looking for modest gains in global equities, driven by higher earnings growth in response to stimulus measures taken earlier in 2019. Arguably, without those earnings gains US equities looked 10% overvalued on a long term view. Faced with today’s Coronavirus challenge a move to 10% – 15% undervalued does not seem unreasonable and leaves us around current levels. In the short term markets will be blown around by news on treatment, vaccination, infection rates, mortality and economic stimulus packages but could potentially re-test their recent lows, particularly if lockdowns remain in place beyond May. We remain of the view that news flow will improve as the year progresses and expect to end the year above current levels.