This week, March 23rd to be exact, is the first anniversary since Boris Johnson gave the Nation a chilling instruction “Stay at home and stay away from others”. Thereafter, the UK entered a lockdown.
Covid-19 has affected us personally and in different ways over the past 12 months, with lives lost and livelihoods hurt. However, in many instances businesses have thrived and by learning to adapt we have all come to appreciate little things. Aspects of freedom, that we once took for granted.
Stock markets are a good place to analyse reactions. Not only in relation to what has happened along the journey, but also as a predictor of what is to come.
March 23rd is a good place to start because as well as being the date that the UK went into lockdown, coincidentally, it was also when the UK stock market reached its lowest level in 2020; at 4,994, down just under 35% from the start of the year.
Chart 1: UK Stock Market Performance
Source: Bloomberg as at 23/03/21
Since the March low point, investors not giving into fear and panic selling, have enjoyed strong positive returns from UK equities. And if we turn our attention to global stock markets, in chart 2 below, investors received even stronger returns by over 10%, reflecting a pattern of growing optimism around the world. World markets have rallied around 50% in sterling terms since the pandemic low.
Thinking back over what has been a period of great uncertainty it is instructive to note that riskier investments like equities, twelve months later, have significantly outperformed defensive assets like governments bonds; also shown in the chart below.
Chart 2: Global Equity V UK Government Bond Price Recovery Since March Lows
Source: Bloomberg as at 23/03/21
Why equities have outpaced lower risk assets at a time of such great uncertainty is an interesting question to ponder. Here we look at some key reasons, which also act as lessons for the future:-
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Central Bank Action
March 19th 2020 was when the Bank of England cut interest rates to 0.1%, four days after the US central bank, the Federal Reserve, cut rates to zero. Other central banks acted similarly with what were emergency moves to help support the economy through the pandemic. As we stand today, this support continues with rates at historic lows.
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Fiscal support
“Unprecedented”, a word used so many times in 2020, levels of support were provided by individual governments. This aid continues today with the most recent example being the $1.9trn stimulus package in the US, predicted to raise US GDP by 3.8% in its first full year. Its effects are also predicted to spill over into other areas of the world with Eurozone GDP predicted to enjoy a 0.5% uplift from the stimulus.
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Vaccination Announcement/Rollout
On November 9th, Pfizer and BioNTech announced to the world that their vaccine candidate was 90% effective in preventing COVID-19 in participants without evidence of prior infection in the first interim efficacy analysis. From there, further vaccines came available from Astrazeneca, Moderna, and others.
The vaccine rollout continues apace with the UK and US the two major economies leading the world. Guidance is that all adults who are willing to be vaccinated will be offered their first dose by the end of July for the UK and all eligibility restrictions in the US will be lifted for vaccinations by the start of May.
What lessons can we take from the above?
Intervention by governments and central banks is to be expected. During extreme events targeted monetary and fiscal policy will be deployed. We also witnessed innovation, from scientists to solve the health crisis wrought by the pandemic, and innovation by businesses to keep commerce alive and moving forward. Investors with a cool head, staying invested, and not trying to time the markets have been rewarded over time. Of course, this requires a degree of calculated risk taking too.
Conclusion
As the global economy continues its reopening journey it is important to avoid getting caught up in negatives. There will be many headlines predicting problems and agonies yet to be faced. Be aware that this is normal. Every day is a challenge. But never forget that every day also presents an opportunity, and for this to be enacted we all need to acknowledge that good things happen too
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