What happened:
As economies come out of lockdown, economic numbers are still dire. The latest Purchasing Managers Index (PMI) numbers are an omen of worse things to come.
A PMI above 50 denotes economic expansion and below 50 contraction. Europe’s numbers for April were dire: Spain came in at 30.8 while Italy, Germany and France reported 31.1, 34.5 and 31.5 respectively. The US did not fare much better, at 36.1.
Asia looked a little bit better with China, Japan and Korea standing at 49.1, 41.9 and 41.6 respectively. The numbers reflect that East Asia has started to emerge from lockdown earlier. The region’s worst months were February and March, whereas Europe and the US were worst hit in March and April.
Nothing can detract from the difficulties of emerging from lockdown, which may be harder than shutting the economy in. It involves weighing up priorities of public health versus economic activity, particularly in democracies where there are strong and vociferous lobbies on both sides. The danger of going too fast is that the course may be reversed, which would be economically costly.
Meanwhile, as Lufthansa edged closer to reaching a rescue deal with the German government, Berkshire Hathaway sold all investments in the US’s four major airlines. The company is sitting on a cash pile of $137 billion. Its chairman, Warren Buffet, explained that this downturn was different from other recessions, and that he saw fewer attractive investments than during the 2008 financial crisis, particularly because the actions of the US Federal Reserve removed the need for many companies to seek a lifeline in the short run.
Background:
Sell in May and go away is a famous bon mot amongst investors. It also seems to hold true in these unusual times.
All markets came down sharply on Friday and the STOXX 600 continued the descent into Monday, as European stock markets, which were closed for the May 1 holiday, caught up.
April saw a big rally after share prices had fallen off a cliff in March. The Nasdaq gained 21 percent and the Dow Jones was up in the double digits as well. There was a big disconnect between equity markets and what happened in the real world. Most economies in Europe and North America were in lockdown during April and unemployment numbers skyrocketed, with first time unemployment claims in the US alone surpassing 30 million over the last six weeks. What saved equity markets were unprecedented stimulus packages, exceeding a total of $8 trillion globally.
Even a swift reaction from governments and central banks cannot mask the shocking economic data hitting us day after day and week after week — especially as the worst is still to come for the second quarter, and uncertainty remains as to how we will emerge from the pandemic.
Where we go from here:
The belligerent trade rhetoric between the US and China is picking up.
In keeping with the sell in May and go away traders’ proverb, May has always been a challenging month for emerging markets with stocks, currencies and local currency bonds declining 8 out of 10 years over the last decade.
We can expect emerging markets to be hard hit going forward as the virus spreads, and some health care systems may find it hard to cope. Investors’ portfolios have been hit by the pandemic. They may seek to preserve wealth and behaviors may become more risk averse, resulting in a preference for safety.
Emerging markets warrant a lot more attention than they are currently getting and future issues shall address this.
— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.
Twitter: @MeyerResources
