ICAEW – MARKET UPDATE

Last Update May 2020

MAZARS WEALTH MANAGEMENT

THE MAN WHO CHANGED THE WORLD

This time is different:

• First “exogenous” economic shock after WWII

• In 1918 a post-war economy made up for the shortfall (plus

GDP coming from a low base).

• The services sector has never been that important

• The world has never been so interconnected and transparent

• Money never moved so fast

• Fastest market drop-and rebound- on record

• Human life has never been more “important” than the

economy.

• The world has neve been this indebted (or had printed so

much non-inflationary money)

• The world has never spent so much money for a medicine

PERFORMANCE AFTER 21ST FEBRUARY

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

Local Currency GBP

Equities Bonds Commodities Currencies

VIRUS IS FLATTENING – AND THE RACE FOR THE CURE IS ON

Total Covid-19

cases (log)

Total Covid-

19 deaths

(log)

41 vaccines currently tested

38 tests being developed

23 treatment medications tested

ECONOMY IS CONTRACTING, FAST

-11.7% -11.8%

-26.9% -27.5%

-35.4%-37.4% -37.8% -38.0%

-50.0%

-45.0%

-40.0%

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

China all caps Japan (topix) World US S&P 500 UK All Caps Europe 600 EM all caps UK LargeCaps

Earnings estimates change since Jan 2020

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

60.00

May

-17

Jul-1

7

Sep

-17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep

-18

Nov

-18

Jan-

19

Mar

-19

May

-19

Jul-1

9

Sep

-19

Nov

-19

Jan-

20

Mar

-20

Global Manufacturing PMI

Global Services PMI

Contraction territory (below 50)

UK ECONOMY IS CONTRACTING, FAST

-14%

-9.50%-8.30%

-6.50%

15%

6%

4%3%

1.50%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

BoE OBR EU IMF

UK GDP Forecast

2020

2021

2022

0

20

40

60

80

100

120

UK Large Cap Listed -36.6% from 21 Feb

UK Mid Cap Listed -31.2% from 21 Feb

UK Small Cap Listed -42% from 21 Feb

UK AIM Listed -96% from 21 Feb

UK Earnings Forecast

ECONOMIC AND MARKET DICHOTOMY

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20

Global EPS 2020 (LHS) normalised

Global Markets (LHS) normalised

Global GDP forecast 2020 (RHS)

THE FASTEST DROP AND THE FASTEST RECOVERY

22

4255

103

167181

202

236

274

320

343353

0

50

100

150

200

250

300

350

400

2020 1929 1987 1946 1962 1937 1940 1966 2007 1973 1970 2001

S&P 500: Number of days from peak to reach -20%

65

70

75

80

85

90

95

100

105

-20 -17 -14 -11 -8 -5 -2 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43

2020 Bear Market

Bear Markets since 1946

Months before (-) and after (+) bear markets

It would -on

average- take us

23 months to

rebound as

much as we did

S&P 500

(monthly)

MARKET GOING ON QUANTITATIVE EASING

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

Sep

-17

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Sep

-19

Dec

-19

Mar

-20

S&P 500

Fed Balance Sheet

RISK ASSETS ARE EXPENSIVE0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

56

11

16

21

26

31

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

MSCI World Forward PE (LHS)

Global Aggregate Index Yield (RHS – Inverted)

Expensive

Cheap

…BUT NOT IF ONE THINKS IN TERMS OF 2022 EXPECTATIONS

10

12

14

16

18

20

22

24

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Average

11

12

13

14

15

16

17

'13 '13 '14 '14 '14 '15 '15 '15 '16 '16 '16 '17 '17 '17 '18 '18 '18 '19 '19 '19 '20

Average

S&P 500 Valuations on 1 year earnings S&P 500 Valuations on 3 year earnings

GOLD STILL A STORE OF VALUE

0

200

400

600

800

1000

1200

1400

1600

1800

2000

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Average

ECONOMIC AND MARKET DICHOTOMY

14

Market

Economy

Economy

Market Mon. Policy Fiscal Policy

Wrong way to look at this market Better way to look at this market

THE POSSIBILITY OF NEGATIVE INTEREST RATE POLICY (NIRP)

15

How NIRP Works

Banks pay for the deposits they hold

with central banks. Depositors are

charged instead of getting an interest.

Banks pass the costs

to consumers and

corporations.

Consumers and corporations

are forced to invest to get a

positive return.

We have printed an unprecedented amount of money. NIRP is a measure to avoid that money staying in cash.

What is the problem?

• In Europe there have been little evidence of

success in the past 3 years. But it has hit bank

profitability.

• Banks in New York fervently

oppose it. So does the Fed and

the BoE.

• Markets, on the other hand want

it, as it will mean more

investments.

Will it happen?

• It is still a remote probability for the UK and the US. But, if the economic slowdown is severe, tools like that could be used.

If that happens, it could completely change the role of cash (and maybe even “near cash” for portfolios.

SNAPSHOT

Market outlook

• It’s a new cycle and the direction is not clear. There are still two unknown variables

• The course of Covid-19 (second wave, testing, medicines, vaccine)

• How consumers will react to the new reality and how unemployment is going to affect people.

• Markets are supported by at least $4tr of new assets (Fed + ECB) and a lot of fiscal spending to keep unemployment low, especially in Europe. Stocks have recovered about half their losses in March.

• Both stocks and bonds right now are very expensive. It’s normal to worry (we do) but traditional metrics capture only earnings (25% downgrade) not earnings + central bank support.

What we are doing for our portfolios.

• We have maintained asset allocation and have benefited from the rebound.

Should clients continue to invest in such an environment?

It is still a good environment to invest over the longer term. Governments and central banks have exhibited their commitment to keep the market going at all costs.

Investing in the financial economy is a great way to hedge against risks in the real economy.

IMPORTANT INFORMATION

17

The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject

to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where

links to third party websites are provided Mazars Financial Planning Ltd accepts no responsibility for the content of such websites nor the services, products or items

offered through such websites.

Mazars Wealth Management is a trading name of Mazars Financial Planning Ltd. Mazars Financial Planning Ltd is a wholly owned subsidiary of Mazars LLP, the UK

firm of Mazars, an integrated international advisory and accountancy organisation. Mazars Financial Planning Ltd is registered in England and Wales No 3172233 with

its registered office at Tower Bridge House, St Katharine’s Way, London E1W 1DD. Mazars Financial Planning Ltd is authorised and regulated by the Financial Conduct

Authority.