Market review: coronavirus fears spread, while UK economic growth remains subdued
Richard Dunbar | March 9, 2020
Time to read: 4 minutes
In his first market review for us, Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments, looks at the impact the coronavirus is having on global economies and markets. And he considers what Brexit talks may mean for the UK economy.
The coronavirus continues to dominate headlines
We’ve now seen outbreaks of the coronavirus across the world, with serious outbreaks in countries such as Japan, Italy and South Korea. The initial reaction of the markets to the outbreak was slight, in some cases non-existent. It seemed like investors thought this was a mainly Chinese issue, and hoped it would be a short-term problem for the global economy.
It’s now clear though that the economic damage will be much more serious than this initial fairly optimistic view. And markets were very quick to respond to this, with equity markets experiencing their worst few weeks since the global financial crisis began in 2008.
The current environment is a testing one. This is because the world is more interconnected than ever, with companies having extremely complex supply chains. In addition, sharply falling commodity prices (including energy prices) and the increasing caution of consumers across the world may lead to cashflow problems for some companies – particularly those with high levels of debt.
Central banks and governments start to take action
The cuts in interest rates in the UK and US, as well as other countries, have demonstrated a willingness and ability to use interest rate policy as one way to alleviate the economic impact of the virus. Together with other tools available to governments, such as quantitative easing, its use shows some resolve from the global community.
The big question is whether the market falls of the past few weeks are merely a short-term reaction or the start of a more significant downturn.
Global bond yields suggest that markets are starting to believe there will be a full-blown global recession. But in our opinion, it isn’t yet clear whether this recession is inevitable. What’s also important to remember is that in a world of low interest rates, assets such as good-quality equities, which offer long-term growth potential, are likely to regain favour in due course.
We’ll keep you up to date on the impact of the coronavirus on economies and markets over the coming months.
UK economic growth likely to remain subdued
There’s been a pick-up in UK economic activity since the end of 2019, when the Brexit impasse, followed by the General Election, perhaps unsurprisingly stalled activity.
But, although we do have some economic growth, there’s not very much of it. The Bank of England has downgraded its view of the potential growth of the UK economy, and it has already cut interest rates as a result of the coronavirus.
Turning to Brexit negotiations, we believe it’s likely to be a year of good and bad headlines as talks progress. Increased friction in the trading relationship with our European neighbours seems inevitable, and the longer-term benefits of any new trade agreement are less certain. That said, it’s still reasonable to expect a mutually acceptable agreement between the UK and the European Union, which does as little as possible damage to both sides.
Some good news for retailers at last
Last month, my colleague Andrew Milligan highlighted the gloom around the UK high street. However, the Office of National Statistics (ONS) announced that retail sales actually went up again in January, experiencing the largest monthly rise since March 2019.
Sales were probably boosted by the removal of some uncertainty around Brexit and the General Election result. Unfortunately though this could be short lived, with the coronavirus likely to have an impact on footfall and spending over the coming months.
Online retailers continue to outperform their high street counterparts – a trend that’s not likely to change any time soon. However, there are plenty of examples of successful brands on the high street, illustrating that if you have good products at competitive prices, it’s still possible to prosper even in the current tough environment.
UK inflation rises, temporarily
UK inflation rose from 1.3% in December to 1.8% in January – the highest for six months. According to the ONS, a rise in the prices of gas, electricity and other fuels were major contributors.
This figure was a little higher than expected, but is still below the Bank of England’s 2% target. Additionally, with the recent falls in energy prices, inflation is expected to also fall in the months ahead.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in.
Information is based on Aberdeen Standard Investments’ understanding in March 2020.