icaew market update
TRANSCRIPT
ICAEW – MARKET UPDATE
Last Update May 2020
MAZARS WEALTH MANAGEMENT
THE MAN WHO CHANGED THE WORLD
This time is different:
• First “exogenous” economic shock after WWII
• In 1918 a post-war economy made up for the shortfall (plus
GDP coming from a low base).
• The services sector has never been that important
• The world has never been so interconnected and transparent
• Money never moved so fast
• Fastest market drop-and rebound- on record
• Human life has never been more “important” than the
economy.
• The world has neve been this indebted (or had printed so
much non-inflationary money)
• The world has never spent so much money for a medicine
PERFORMANCE AFTER 21ST FEBRUARY
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
Local Currency GBP
Equities Bonds Commodities Currencies
VIRUS IS FLATTENING – AND THE RACE FOR THE CURE IS ON
Total Covid-19
cases (log)
Total Covid-
19 deaths
(log)
41 vaccines currently tested
38 tests being developed
23 treatment medications tested
ECONOMY IS CONTRACTING, FAST
-11.7% -11.8%
-26.9% -27.5%
-35.4%-37.4% -37.8% -38.0%
-50.0%
-45.0%
-40.0%
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
China all caps Japan (topix) World US S&P 500 UK All Caps Europe 600 EM all caps UK LargeCaps
Earnings estimates change since Jan 2020
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
60.00
May
-17
Jul-1
7
Sep
-17
Nov
-17
Jan-
18
Mar
-18
May
-18
Jul-1
8
Sep
-18
Nov
-18
Jan-
19
Mar
-19
May
-19
Jul-1
9
Sep
-19
Nov
-19
Jan-
20
Mar
-20
Global Manufacturing PMI
Global Services PMI
Contraction territory (below 50)
UK ECONOMY IS CONTRACTING, FAST
-14%
-9.50%-8.30%
-6.50%
15%
6%
4%3%
1.50%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
BoE OBR EU IMF
UK GDP Forecast
2020
2021
2022
0
20
40
60
80
100
120
UK Large Cap Listed -36.6% from 21 Feb
UK Mid Cap Listed -31.2% from 21 Feb
UK Small Cap Listed -42% from 21 Feb
UK AIM Listed -96% from 21 Feb
UK Earnings Forecast
ECONOMIC AND MARKET DICHOTOMY
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20
Global EPS 2020 (LHS) normalised
Global Markets (LHS) normalised
Global GDP forecast 2020 (RHS)
THE FASTEST DROP AND THE FASTEST RECOVERY
22
4255
103
167181
202
236
274
320
343353
0
50
100
150
200
250
300
350
400
2020 1929 1987 1946 1962 1937 1940 1966 2007 1973 1970 2001
S&P 500: Number of days from peak to reach -20%
65
70
75
80
85
90
95
100
105
-20 -17 -14 -11 -8 -5 -2 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43
2020 Bear Market
Bear Markets since 1946
Months before (-) and after (+) bear markets
It would -on
average- take us
23 months to
rebound as
much as we did
S&P 500
(monthly)
MARKET GOING ON QUANTITATIVE EASING
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
Jun-
12
Sep
-12
Dec
-12
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
Dec
-15
Mar
-16
Jun-
16
Sep
-16
Dec
-16
Mar
-17
Jun-
17
Sep
-17
Dec
-17
Mar
-18
Jun-
18
Sep
-18
Dec
-18
Mar
-19
Jun-
19
Sep
-19
Dec
-19
Mar
-20
S&P 500
Fed Balance Sheet
RISK ASSETS ARE EXPENSIVE0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
56
11
16
21
26
31
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
MSCI World Forward PE (LHS)
Global Aggregate Index Yield (RHS – Inverted)
Expensive
Cheap
…BUT NOT IF ONE THINKS IN TERMS OF 2022 EXPECTATIONS
10
12
14
16
18
20
22
24
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Average
11
12
13
14
15
16
17
'13 '13 '14 '14 '14 '15 '15 '15 '16 '16 '16 '17 '17 '17 '18 '18 '18 '19 '19 '19 '20
Average
S&P 500 Valuations on 1 year earnings S&P 500 Valuations on 3 year earnings
GOLD STILL A STORE OF VALUE
0
200
400
600
800
1000
1200
1400
1600
1800
2000
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Average
ECONOMIC AND MARKET DICHOTOMY
14
Market
Economy
Economy
Market Mon. Policy Fiscal Policy
Wrong way to look at this market Better way to look at this market
THE POSSIBILITY OF NEGATIVE INTEREST RATE POLICY (NIRP)
15
How NIRP Works
Banks pay for the deposits they hold
with central banks. Depositors are
charged instead of getting an interest.
Banks pass the costs
to consumers and
corporations.
Consumers and corporations
are forced to invest to get a
positive return.
We have printed an unprecedented amount of money. NIRP is a measure to avoid that money staying in cash.
What is the problem?
• In Europe there have been little evidence of
success in the past 3 years. But it has hit bank
profitability.
• Banks in New York fervently
oppose it. So does the Fed and
the BoE.
• Markets, on the other hand want
it, as it will mean more
investments.
Will it happen?
• It is still a remote probability for the UK and the US. But, if the economic slowdown is severe, tools like that could be used.
If that happens, it could completely change the role of cash (and maybe even “near cash” for portfolios.
SNAPSHOT
Market outlook
• It’s a new cycle and the direction is not clear. There are still two unknown variables
• The course of Covid-19 (second wave, testing, medicines, vaccine)
• How consumers will react to the new reality and how unemployment is going to affect people.
• Markets are supported by at least $4tr of new assets (Fed + ECB) and a lot of fiscal spending to keep unemployment low, especially in Europe. Stocks have recovered about half their losses in March.
• Both stocks and bonds right now are very expensive. It’s normal to worry (we do) but traditional metrics capture only earnings (25% downgrade) not earnings + central bank support.
What we are doing for our portfolios.
• We have maintained asset allocation and have benefited from the rebound.
Should clients continue to invest in such an environment?
It is still a good environment to invest over the longer term. Governments and central banks have exhibited their commitment to keep the market going at all costs.
Investing in the financial economy is a great way to hedge against risks in the real economy.
IMPORTANT INFORMATION
17
The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject
to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where
links to third party websites are provided Mazars Financial Planning Ltd accepts no responsibility for the content of such websites nor the services, products or items
offered through such websites.
Mazars Wealth Management is a trading name of Mazars Financial Planning Ltd. Mazars Financial Planning Ltd is a wholly owned subsidiary of Mazars LLP, the UK
firm of Mazars, an integrated international advisory and accountancy organisation. Mazars Financial Planning Ltd is registered in England and Wales No 3172233 with
its registered office at Tower Bridge House, St Katharine’s Way, London E1W 1DD. Mazars Financial Planning Ltd is authorised and regulated by the Financial Conduct
Authority.