Prospects for world economic growth have been overwhelmed by massive and unprecedented disruption occasioned by the coronavirus pandemic. Global recession now looks imminent. Saudi Arabia's shock decision to increase its output of oil, following a disagreement with Russia, triggered the largest single-day decline in the price of crude since the start of the Gulf War in 1991. It will continue to have a negative impact on share prices until such time as production targets are agreed. Equity markets have come under considerable pressure, pulling company valuations down to more attractive levels.
As to the future, much will depend on the success of COVID-19 containment. It is hard to see any sustained recovery until this has been achieved. In the meantime, governments have set out massive spending packages to support economic activity and central banks have cut interest rates sharply. A low oil price will also assist disposable incomes. Eventually, these factors should support a resumption of economic growth and stock markets should strengthen accordingly, once health concerns subside.
The outlook for the US economy was deteriorating before the spread of the virus gained momentum, even while employment levels and real wage growth remained at high levels. It has now worsened dramatically, and unemployment is rising steeply. The US general election depends on the perceived success of the government's handling of the pandemic and its economic consequences.
Forecasts for the UK have also been overtaken by the health crisis, after beginning to look more positive following the Conservative election victory. The country was already facing difficult negotiations with the EU to reach a trade agreement, now likely to be delayed. The trading bloc itself finished 2019 very weakly and by February was growing at its slowest rate in seven years.
Similarly, Japan began to slide into recession at the start of the year following a collapse in Chinese tourism and a hike in consumption tax implemented last autumn, while rising infections are now likely to undermine domestic demand. However, the Japanese Central Bank's share buying programme is providing some support to the local equity market.
Growth in China can be expected to rebound if the health emergency has really been brought under control there. The economy has deteriorated sharply in recent months. The rest of Asia has suffered from the effect of this slowdown, while domestic demand in India has been slackening for some time. Prospects for Latin America were also looking difficult, although there have been some signs of progress in Brazil.
The asset allocations in the portfolio have been relatively defensive for several years, but the investment case for holding government bonds is weakening in the face of shrinking, and in some cases negative, returns.
At the same time, company valuations were stretched at the start of the calendar year, but subsequent market falls are starting to give rise to new investment opportunities, even if earnings are vulnerable in the short-term. Provided the global economic fabric is not irretrievably damaged, equities and many markets are now looking more reasonably valued again for investors with a longer-term horizon.
As such, the equity allocation was increased to 65% in March, with a corresponding decrease in the bond holdings.