A Crucial Period Ahead

Initially, 2020 was expected to be a positive one after a remarkable 2019. Yet, this optimism soon faded out, with the emergence of the COVID-19 outbreak causing havoc and creating a blood pool across the world economies. We shall be expecting crucial data and results from the major economies and companies which will portray numerical evidence of the effect of the global epidemic. Yet the emergence of positive news related to this epidemic has seen its results registering a rally after reaching a bottom during the last week of March.

Initially, as the outbreak spread across the globe, the market’s reaction was unanimous. Starting in late February, trading turned highly volatile, which led the S&P 500 to its steepest drop into a bear market since 1933. By March 23, the plunge had wiped out almost $10 trillion in wealth and ended an 11-year bull run.

The same cannot be said during the last week of March, after the Federal Reserve announced plans to pump trillions of dollars of new money into the markets and Congress passed a $2 trillion economic rescue package. The stimulus coupled with positive news from health authorities, set off a remarkable rally across both bonds and equity markets.

Stocks also gained amid signs that the virus outbreak has peaked and some relaxation of previous measures could start slowly in the next few weeks. Furthermore on April 17, results of an early study from a Gilead Sciences drug showed promise with severe cases of coronavirus. Sectors such as technology, healthcare and consumer discretionary registering gains between 4 to 6%.

Amongst the economic data being issued during the coming weeks we find manufacturing, trade and most importantly unemployment data. Unemployment will again be in the limelight as economists see whether the number of workers seeking claims has reached its peak or are there signs of workers returning to their jobs, as financial aid from governments reach the hands of the business owners.

Quarter one earnings began to roll two weeks ago, starting with the major banks. As expected figures were generally negative. As first quarter earnings were expected to be down by 14.5%, the actual results portrayed a worse picture for the quarter. The result from the big banks made it clear that they are experiencing a surge in loan losses as the pandemic casts serious doubt on the ability of consumers and companies to repay their debt. In fact, during the first quarter the six major banks experienced a huge spike of in their year-on-year loan loss charges.

The change puts banks to the test as to how banks are ramping up reserves to deal with anticipated loan problems among their clients. The provisions created by banks are additions to reserves so banks have enough in their rainy day fund to cover future losses. It is now almost certain that banks need to revise their loan-loss reserves in the coming quarters.

But the recent earnings conferences given by the major Banks CEOs did portray a sense of confidence. Banks entered the COVID-19 scene with a well-capitalized balance sheet, while aggressive fiscal and monetary policies put into place by the Federal Reserve and the US Government were designed to facilitate lending with little risk to the banks themselves. However this hasn’t been enough for investors who have sold in the recent rally.

In addition, some of the companies reporting are among those worst hit by the pandemic’s fallout. They include airlines – with major US carriers last week agreed in principle to a $25 billion U.S. rescue package. Definitely financial results are going to be negatively impacted especially for the badly hit sectors such as tourism and hospitality. However, investors may give more weight to the words of company executives rather than headline-grabbing numbers, as investors seek evidence that corporations can weather the uncertainty caused by the coronavirus pandemic. Therefore, it all boils down to the commentary rather than the numbers provided by these companies.

Definitely it is not easy to be an investor during volatile periods. Most probably the anxiety levels of many have sky-rocketed. None of us has a crystal ball and we do not know when a bottom is reached or when markets will turn volatile. This does not mean that investors should cash out and wait for markets to calm. On the other hand, a reassessment of one’s risk might be warranted, if after the last few weeks the investor felt uncomfortable with the way the portfolio fluctuated. In addition, investors should stay away from herd behavior and follow what others are doing. Their risk tolerance might be different. Finally, if investors believe that this is an opportune time to participate in the market but they lack the willingness to commit large amounts of money, they can start off with small regular amounts paying off in the long term

Julian Mangion, B. Com ICWIM,  is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]