After the severe shock in March, markets rebounded strongly in April. COVID-19 continued to spread globally, but some countries saw daily new infection rates start to fall and are now planning to gradually reopen their economies. Governments and central banks introduced very significant stimulus measures to reduce the damage caused by the economic shutdown, restoring some positive sentiment to markets.

Volatility declined from extreme levels. Developed stock markets outperformed emerging markets and growth stocks outperformed value. The S&P 500 index returned 12.8% and has recovered close to 60% of its prior decline. Fixed Income markets rallied as central banks committed to purchase more government and corporate bonds.

Despite April’s market rebound, considerable uncertainty remains over the trajectory of global growth over the coming quarters. A lot will depend on the extent to which economies can successfully reopen. For this reason, investors should remain prudent and expect further volatility.

Exhibit 1: Asset class and style returns

Source: Bloomberg Barclays, FTSE, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2020.

Eurozone

In Italy, the initial epicentre of the outbreak in Europe, the number of new cases is decreasing and a gradual business re-opening will take place. Germany has already relaxed some restrictions. The eurozone’s real GDP contracted 3.8% in the first quarter of the year and the second quarter is likely to show a faster decline. The composite April Flash PMI indicator for the eurozone fell to an all-time low of 13.5, confirming a substantial hit to businesses. The International Monetary Fund estimates a drop in 2020 GDP of over 7%, with a significant increase in deficits and debt levels. 

The European Central Bank (ECB) continued its quantitative easing programme, applying some flexibility by putting an increased emphasis on purchases of government bonds of those countries with the greatest need due to the virus, including Italy and Spain. The ECB also eased collateral requirements to include high yield securities in order to support lending to small and medium-sized enterprises.

The Eurogroup launched an emergency support plan of EUR 540 billion and the European Council also announced a recovery fund, although the details will have to wait for further discussion in May. The MSCI Europe ex-UK Index returned 6.3% over April.

Exhibit 2: Fixed income government bond returns

Source: Bloomberg Barclays, Refinitiv Datatsream, J.P. Morgan Asset Management. All indices are Bloomberg Barclays benchmark government indices. All indices are total return in local currency, except for global, which is in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2020.

US

Management of the epidemic in the US has inevitably become a political battleground with the election due later this year. The percentage of people who evaluate the state of the economy as good or excellent fell from a peak of 57% registered at the beginning of the year to only 23%, according to the PEW Research Center.

The US economy contracted at an annualised pace of 4.8% in the first quarter of the year. Fiscal stimulus measures launched by Congress have been enormous, but more may still be required. The number of jobless claims has increased by 30 million in the last six weeks. How many of these layoffs end up being temporary will be key for the outlook. The extent of the economic deterioration due to the shutdown was evident in the April Flash composite Purchasing Managers’ Index (PMI), which plunged to 27.4. Retail sales also fell 8.4% in March.

The Federal Reserve’s (the Fed’s) response has been dramatic in both size and speed. The US central bank has committed to unlimited government bond purchases. It will also now buy investment grade corporate bonds and high yield bonds (provided that the issuer had an investment grade rating prior to 22 March). In addition, the Fed will purchase corporate bond exchange-traded funds (ETFs), including some high yield ETFs. The action of the central bank contributed to a sharp decline in investment grade and high yield spreads, and kept Treasury yields low despite the massive fiscal stimulus being provided.

Exhibit 3: Fixed income sector returns

Source: Bloomberg Barclays, BofA/Merrill Lynch, J.P. Morgan Economic Research, Refinitiv Datastream, J.P. Morgan Asset Management. Global IL: Barclays Global Inflation-Linked; Euro Gov.: Barclays Euro Aggregate Government; US Treas: Barclays US Aggregate Government - Treasury; Global IG: Barclays Global Aggregate - Corporates; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBIG. All indices are total return in local currency, except for EM and global indices, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2020.

UK

The Flash PMI indicators for April followed a similar trajectory to Europe, with the composite business survey falling to 12.9. Retail sales in March fell by 5.1% month on month (-19.4% excluding food).

The FTSE All-Share index underperformed most other equity markets in April due to the exposure to the energy sector, and closed with a return of 4.9% over the month.

Emerging markets

China’s economy has been gradually reopening. First-quarter real GDP declined by 6.8% year on year (-5.2% for the service sector). But since March, there has been a recovery in production, retail sales and investment. The China Urban Survey unemployment rate fell to 5.9% in March from 6.2% in February.

Despite the pickup in economic activity, it is premature to expect a rebound that rapidly undoes all of the prior decline in output. Much will depend on the success of exit strategies globally. Demand for Chinese goods from Europe and the United States, where social distancing measures are still in place, could remain weak. Moreover, to prevent a second wave of contagion, China may have to maintain social distancing, particularly in some sectors, such as sports, cinema and restaurants, leading to a softer recovery.

The People’s Bank of China increased its monetary stimulus, cutting the one-year targeted medium-term lending facility (TMLF) rate by 20 basis points (bps) to below 3% and the one-year and five-year prime rate loans (PRL) by 20bps and 10bps respectively. Social financing data showed an acceleration in loan issuance, reducing liquidity risks.

With the rebound in April, the year-to-date drop in the CSI 300 index was sharply reduced to -4.5%, thanks to its high exposure to domestic consumption dynamics and the limited index weighting in energy compared with some other indices. Markets are also optimistic that, while severe, the pandemic does not derail China’s positive structural growth outlook.

South Korea has managed to contain the contagion relatively well with a massive amount of testing and tracing. The efficient management of the pandemic favoured President Moon Jae-in, who’s Democratic Party won a large majority in the election.

A number of emerging market central banks cut rates to support their economies, including South Africa and Turkey. Rate cuts contributed to weaker currencies, which reached new lows against the dollar.

Exhibit 4: World stock market returns

Source: FTSE, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2020.

Conclusion

Massive global fiscal and monetary responses fueled a strong market rebound in April despite macroeconomic data that showed the huge economic cost of the COVID-19 shutdowns. 

Analysts revised down 2020 earnings estimates, which are now expected to decline by over 15% in the US and Europe. Dividends may also suffer cuts as companies prioritise balance sheet protection over profit distribution.

The S&P 500 Index outperformed and MSCI Asia ex-Japan and emerging markets followed, thanks to the first signs of economic recovery in Asia. Technology stocks recorded solid returns.

Fixed income rallied, supported by the massive amount of monetary accommodation introduced globally, and credit outperformed government bonds. 

The oil price remained volatile despite the agreement on production cuts. West Texas Intermediate (WTI) oil futures for imminent delivery went negative as weak demand and difficulties in managing US oil storage meant traders were briefly paid to take physical delivery of oil. 

Overall we retain a degree of caution as we expect the recovery from the COVID-19 shutdown to be gradual. However, we acknowledge that the unprecedented policy response – particularly the willingness of central banks to intervene in credit markets – has shifted the balance of risks.

Exhibit 5: Index returns for April 2020 (%)

Source: Bloomberg Barclays, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Data as of 30 April 2020.