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Same virus, different market reactions

Coronavirus dominates share market thinking and brought on the big bear dip in most markets. It does not, however, seem to be the severity of the virus that differentiates between the different countries.

Futuristic Technology as a world map in the background

by
John Redwood

in Features

23.04.2020

This week the value of companies quoted on the US Nasdaq index continued to outpace the value of all the listed companies outside the USA in the World Index. We anticipated a favourable trend for technology, a large component of Nasdaq, but the pace and magnitude of the moves is still remarkable.  So far this year Nasdaq has managed a positive return of 4% compared to a fall in the overall world index of 11%.

Whilst the world has suffered together from the advance of the virus and has acted together to close many businesses to stop its spread, the performance of share markets has been divergent. The US market overall thanks to its large share of technology is down 8%, whilst the main European share index is down 22% and Latin America down a massive 40%. China has been stable, though it is still well down on its previous high.

The virus dominates share market thinking and brought on the big bear dip in most markets. It does not, however, seem to be the severity of the virus that differentiates between the different countries. Within the EU Germany has had a much lower death rate with much less pressure on its health service than Italy or France, yet the German share market has fallen a little bit more this year than the Italian and French markets. Latin America so far is not worse affected by the pandemic than Europe, but the markets are down by much more.

There are several reasons why geography has made a big difference to share returns. The USA has led thanks to the dominance of Amazon, Google, Microsoft, Facebook, Apple, Netflix and the other technology and digitally based businesses of the internet revolution. All of these stand to win customers and market share during the lockdowns and can probably hang on to many of the gains as controls are gradually relaxed. China has been more stable thanks to substantial government support and the fact that the market had its big fall five years earlier. Investors seem to be looking through the crisis to think about the pattern of growth, revenues and profits when the immediate challenge of the disease is past its peak. Germany still faces a big problem with its heavy reliance on car production. The Green revolution was forcing expensive change and threatening loss of market share before the virus closed many car showrooms and accelerated trends to less motoring.

Latin America has suffered because it is a heavily borrowed part of the world that suffers from a strong dollar. Loans in the US currency are dearer to service and repay as the dollar climbs. There tends to be a flight into quality at times of stress, which usually means into dollar assets. Argentina has got into difficulties again with its large international debts. Brazil’s economy is hit by the fall in world trade and in commodity prices where she is a producer. Mexico suffers from the recession in the USA.

There will come a time when emerging market countries look good value and when the rest of the world rallies relative to the all-conquering Nasdaq. Meanwhile, the technology companies can look forward to reporting revenues and earnings up in many cases at a time when most companies are in a temporary slump. They can say the future is digital, as businesspeople turn to WebEx, families keep in touch with Zoom and governments work through Microsoft Teams, or the other way around. Cashflow matters. In a world of slashed investment budgets, there will still be a big spend on technology as companies rush to adapt their business models. Progressive return to work may be conditional on more remote working patterns. More of the customers are online and more of the employees are working from home, so it will be the digital giants that find ways to reward themselves for playing a bigger role in our lives.

Yesterday the US Senate approved another $428bn package of support for the US economy. $328bn was more money for small business loans under the Paycheck programme to keep people in jobs, and the balance was for hospitals and virus testing centres. Paycheck allows smaller companies hit by virus restrictions to borrow money for two years at 1%. The purpose is to let them pay their employees whilst the economy is in lockdown. There is a 100% state guarantee on the loan and some of the loans may be transformed into grants at a later date. Today the EU will confirm its early April programme which we have reviewed before and will have talks about an additional Recovery package which is unlikely to be agreed in detail at the meeting.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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