These five factors will decide where markets go as lockdown eases
On the other side of the windows out of which we now watch the world, spring is in bloom and yesterday the first shoots of the Government’s plan to exit lockdown emerged. The restriction of movement and economic activity has caused untold damage to the country’s and household finances – something stock markets were quick to factor in. But as we regain our liberties, will share prices follow? And where should investors be looking for returns?
The outlook for markets remains muddled and share prices have been erratic, at best. Britain’s main index, the FTSE 100, lost a third of its value in March but has come back in recent weeks. However, it closed yesterday at 5,905, its lowest level since Feb 2011. A range of factors will affect which direction British share prices head from now.
For one, investors generally lose their confidence in a collective wave but regain it in a trickle – don’t expect a quick reversal of sentiment. Fears of a second wave of infections, and a second lockdown, will also act as a downward force until a vaccine is found. In addition, there remains material uncertainty over the price of oil – which affects a large segment of Britain’s main index.
Many experts also believe the easing of rules will not be enough to save the economy from a deep, dark and prolonged recession. This means share prices would have no fundamental reason to rise – apart from those belonging to the most insulated, safest and economically insensitive companies, such as utilities, essential consumer goods brands, insurers, technology stocks and healthcare businesses.
The value of the pound – which has fallen since the Bank of England cut interest rates and re-started its money-printing quantitative easing programme – will also play a crucial role.
A change to the country’s lockdown policy – and therefore businesses’ ability to grow sales – is a key turning point. However, what may become clear is that many firms only planned for short-term disruption. Something that will catch them off guard as the year, and the pandemic, drags on.
Dan Smith of Canaccord Genuity,a wealth manager, said investors will soon start to learn businesses may not be able to adapt to persistent and long-lasting disruption. They will quickly decide many are not worth owning.
He added: “We’re only seeing what effects a new normal will have on businesses now. They will continue drawing up new plans as the situation develops but this isn’t temporary and we will see severe downgrades to earnings which will drive down share prices.”
Nobody wants to ride the second wave
Stock markets are unmoved this week amid fear of a second wave of coronavirus hitting populations in countries seemingly on the other side of the pandemic. While this has not meaningfully pushed share prices down it lurks as a constant risk and may impede markets rising.
David Madden of CMC Markets said: “It is something that traders are mildly worried about as it is a very real possibility. It seems too early to say whether there will be a painful second wave of Covid-19 cases.”
Mr Smith said that markets – which have risen from lows since at the end of the March – have embedded too much optimism and widespread belief there will be some return to normality. In such a scenario investors would be wise to only hold on to businesses that flourished in the initial stages of lockdown – tech firms and essential retailers.
“A second wave will throw that out the window. Any economic and market recovery we have had will be broken and it becomes less likely we will ever return to how it was before,” he added.
The future of black gold
Oil stocks account for nearly 10pc of the FTSE 100 and the price of fuel has a big impact on the overall index. A lower oil price does not negatively impact the majority of companies in Britain – but its size relative to the rest of the index affects how investors feel about putting more money into stocks. It also drives how much cash is invested into passive funds which affects all share prices.
