The coronavirus is impacting global indices differently. We take a closer look at how the FTSE 100, the S&P 500 and the Shanghai SSE Composite index have performed recently.
The coronavirus’ impact around the world is unprecedented and horrific. In terms of global indices, such as the FTSE 100, S&P 500 and SSE Composite index, the challenge for the investor is to work out which ones will rally first — and then whether that recovery will be sustained.
Does China’s report of no COVID-19 deaths on 7 April mean the Shanghai SSE Composite index should be first out of the blocks? Or should you turn instead to the S&P 500, which during a rollercoaster March fortnight suffered both its worst day since 1987 and then, thanks to a fiscal stimulus package, its best day in more than 10 years? Or does the FTSE 100’s weighting towards the financial sector make it the best placed (or worst placed) index for a sustained recovery?
“We are dealing with a global health and humanitarian crisis,” says James Norrington, editor at the Financial Times’ magazine Investors Chronicle. “But this isn’t about profiting from others’ misery and misfortune. It’s setting yourself up to benefit from the recovery.”
“We are dealing with a global health and humanitarian crisis, but this isn’t about profiting from others’ misery and misfortune. It’s setting yourself up to benefit from the recovery” - Investors Chronicle editor, James Norrington
Thanks to Brexit shenanigans, the FTSE 100 index had already had a bumpy 12 months. Following a decisive UK general election result and clarity of an exit timetable, things had finally begun to settle down. Then along came COVID-19.
FTSE 100 stocks have been hit hard by the effects of the virus — the FTSE All-Share was down more than 25% in the first three months of 2020, compared with a 20% drop on the S&P 500 and -9.83% on the SSE.
However, the FTSE 100 has bounced back 15.9% as of 17 April from its 23 March low, as optimism spreads that the contagion may be slowing. This is backed by the fact that after three weeks of lockdown, some of the worst-performing FTSE stocks were supermarkets, utilities and pharmaceuticals. Until then they had done well but have seen investors offload to cash in, since.
FTSE 100 price gains since its 23 March low
In the longer term, the FTSE 100’s recovery may well be boosted by UK chancellor Rishi Sunak’s business stimulus package that allows thousands of companies to continue operations, boosting consumer and investor confidence.
However, history is not on the FTSE 100’s side. It took two years to recover its pre-Black Monday heights, three years after the 2008 global financial crash and more than five years after the dot-com bubble.
The good news is that the vast majority of FTSE 100 businesses are robust, financially sound organisations — but there are concerns. A fifth of these are finance institutions, which could hamper the index’s recovery in the event of poor banking performance. Furthermore, the index contains 12 energy companies — three times the percentage of the S&P 500 – which could be hit hard in the months ahead if the Russia-Saudi Arabia oil price war continues.
“Big oil companies are looking less attractive as long-term investments because their operations could produce less profit going forward,” says Norrington. The FTSE 100 “is dominated by large ex-growth companies in industries facing major structural challenges such as oil, gas and banking.
“Coronavirus may have made these companies cheaper, but the way they make money for investors — primarily by paying dividends — could be less sustainable going forward, largely due to the recalibrations of asset markets sparked by the coronavirus sell-off.”
“Coronavirus may have made these companies cheaper, but the way they make money for investors — primarily by paying dividends — could be less sustainable going forward, largely due to the recalibrations of asset markets sparked by the coronavirus sell-off” - James Norrington
In addition, the FTSE 100 is heavily loaded by internationally focused companies which generate much of their income in foreign countries and their performance is reliant on how quickly other global economies emerge from the crisis.
The COVID-19 crisis has underlined the value of technology, which has made encouraging reading for the S&P 500 companies in the IT sector.
Certainly, at the moment, the S&P 500 looks more like the S&P five — Apple [AAPL], Microsoft [MSFT], Amazon [AMZN], Google’s owner Alphabet [GOOG] and Facebook [FB] are collectively worth $4.85trn, nearly a fifth of the index’s entire value and healthcare the next biggest sector at 14.2%. The index has already regained half of the 33% it shed in the month to March 23, suggesting that in the short term the S&P 500 is the place to be.
However, with the US recording more COVID-19 deaths than anywhere else in the world, the impact on the wider American economy suggests that the longer-term future of the S&P 500 is not quite as encouraging. With a record surge in unemployment claims and an imminent recession seen by many as a foregone conclusion, Barclays this week downgraded its year-end S&P price target by a mighty 16%. The bank is also contradicting optimistic predictions of a V-shaped recovery by forecasting a likely U-shape or, in a worst-case scenario, even an L-shaped one.
Longer-term recovery is also hampered by the index’s weighting towards the so-called BEACH industries — booking, entertainment, airlines, cruises and hotels. Names such as Walt Disney [DIS], Booking Holdings [BKNG] (owner of booking.com, Priceline and OpenTable), Expedia [EXPE], Live Nation [LYV] and numerous airlines including Delta [DAL], United Airlines [UAL] and American Airlines [AAL] are among communications and consumer discretionary companies that constitute a further 20% of the S&P 500. The US’ ‘shelter in place’ lockdown restrictions are likely to impact these for many months to come.
“The rally in equities will likely be short-lived as investors will soon become sceptical of the great recovery and focus on the financial stress that happens after key parts of the economy will not come back to life for many months,” says Edward Moya, senior market analyst with New York-based foreign exchange brokers Oanda. “Travel, entertainment, and physical retail will not see any normalcy until much later in the year. I don’t see people going to a show, baseball game or trying to book a vacation this summer.”
“The rally in equities will likely be short-lived as investors will soon become sceptical of the great recovery and focus on the financial stress that happens after key parts of the economy will not come back to life for many months” - Edward Moya, senior market analyst
Shanghai SSE Composite
The Shanghai Composite was riding high to the turn of the year — the 22.3% achieved in 2019 was the second-highest of the last decade.
Its overall buoyancy has also seen the SSE top the IPO league table for the first time in three years, with 33 companies raising $7.31bn (including the eyebrow-arching $70m flotation of Bestore, a snack food business from — of all places — Wuhan in China).
But as the virus took hold, the SSE plunged 11.3% in the fortnight to 3 February. It took just a month to recover — but when COVID-19 started to hit Europe and the US the SSE plunged again to a 13-month low at the end of March.
Price drop of the SSE index over 2 weeks
Unsurprisingly its healthcare companies have fared best in recent weeks while farming, forestry, animal husbandry and fishing companies have also done well. The SSE is heavily weighted towards financials — they account for 36.1% of the index while industrials is the next biggest sector at 16.4% according to Siblis Research — which have suffered. Insurers have lost 20% and banks around 16%.
The People’s Bank of China has cut reserve requirements, which will encourage lending to firms hit by the coronavirus. This and other fiscal, monetary and societal interventions such as a quick lockdown have been praised by some analysts for containing the outbreak and ensuring the country’s economic stability.
But only by some. As more countries overtake China’s COVID-19 death toll, there’s increasing global scepticism of the veracity of some of the virus figures and narrative coming out of Beijing, which is likely to skew its market performance.
“Whether A-shares can continue to be relatively independent of overseas markets in the future and truly become a safe haven for foreign investors depends on the performance of China’s economic fundamentals,” says Zhu Qibing, chief macro-economist at BOC International China.
“Whether A-shares can continue to be relatively independent of overseas markets in the future and truly become a safe haven for foreign investors depends on the performance of China’s economic fundamentals” - Zhu Qibing, chief macro-economist at BOC International China
“All these decisions highlight the resilience of the country’s economic growth and can help unleash the potential of A-shares.”