Second Quarter 2020 Review & Outlook

Executive Summary

Thank goodness the second quarter was not the same as the first quarter!! We are now looking forward to staggered growth with an expectation that any COVID investment losses will be recovered by the end of the year.

At the end of February, the global economy was strong, and we were expecting a good year for investments. Out of nowhere, COVID-19 changed all that. At the end of the first quarter Shares around the world tumbled, with the UK’s own FTSE share index losing one third of its value, falling from 7500 before COVID to a low of 5000. Since that point, however, and throughout the second quarter it has been slowly rising:

The FTSE is typical of most of the markets in the developed world and now stands at around 6300 making up almost half of its losses, although you can see from the chart that the trend is upward with a lot of “ups and downs” (volatility) in that upward trend

Where are markets likely to go?

Just as COVID-19 created the share fall, solving the COVID-19 problem will cause markets to rise. We see the COVID-19 problem as falling into two areas: (1) Controlling and eventually neutralising the virus through a vaccine and (2) managing the negative impact on economies around the world due to governments’ closing their economies to limit the spread of the virus.

As you can see from the graph below, the virus now appears to be under control in Europe and the US, apart from the southern states of America. The US is stalling but with recent increases in the effectiveness of treatments, and the move to online spending, this is less of an economic impact than a health impact. Economies around the world are slowly opening although measures such as face masks make the position far from normal.

News on the Vaccine also looks positive:

Moderna’s vaccine trial of 45 patients has created antibodies and they are moving to a 30,000-person trial in July.
Oxford and Cambridge are entering large scale testing.
Professor Robin Shattock of Imperial College, London stated they were on track for a vaccine for early next year and were building production capacity to vaccinate the whole of the UK by the middle of next year. He is also of the opinion that with so many initiatives around the world to achieve a vaccine there is only a “very slim chance” that a vaccine will not be found.

China are in front of us in terms of the virus. What is happening there?

In the Far East, as can be seen from the graph below, China is controlling infections, although the validity of data from China is always questioned.

Reports from personnel in China confirm that China is back to normal in terms of production and is effectively managing any outbreaks, such as the recent Beijing outbreak, by an aggressive track and tracing system. Only cinema, concerts and large sporting events are still in lockdown. Other countries in the region are not fairing as well – Japan – due to a lack of track and tracing system and India due to the high population density in Delhi and Bangalore.

The impact on share values of getting “back to normal” can be seen from the graph below where China is in healthy positive territory, contrary to other parts of the world:

Full year outlook

There is still uncertainty but our most likely outlook for the remainder of the year is that:

The skills of governments in managing outbreaks will improve allowing economies to open and remain almost fully open. Governments and Health systems in the developed world are more prepared and will better manage any second wave. If this does materialise to any extent, focused lock-downs will occur.
There will be more negative economic news (job losses, company closures etc.) and the effectiveness of government Furlough schemes etc. will become known. The markets have already priced this into share prices for the next three months, so share prices will only be impacted by unexpected news. The market does not like surprises.
There will be further positive steps on the Vaccine causing share prices to rise. (Remember, the markets price of a share is looking 3 months ahead and a vaccine is due early 2021)

Gradually as the fear of the virus subsides, we are expecting staggered growth with an expectation that any COVID investment losses will be recovered by the end of the year and the year may even be positive.