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Jul 02, 2020

Markets not out of the woods yet

Investors turn to cash despite low-interest-rate environment

During the lockdown period, investors have been hesitant. This has been made more complicated by the fact that the coronavirus pandemic is a health crisis marred with uncertainty. It is difficult to adequately plan for the future when taking into account an event scientists are only beginning to understand. 

Until recently, there was a general sense of optimism that we were finally witnessing the beginning of the end of the pandemic. Governments around the world were relaxing their social distancing measures, and the markets were clearly taking note. The FTSE entered bull market territory and was quickly recouping losses initially incurred when the lockdown was introduced in the UK. The S&P 500 also recorded its biggest rally since 1957, jumping by 40 percent in 50 trading days. 

At this point, it looked as though investors were confident the market volatility spurred by the virus had largely subsided. The situation has now changed significantly, however. Coronavirus cases are rising in the US, and there are talks of certain countries and regions once again going into lockdown. This has been having a direct impact on the stock market. With the number of coronavirus cases exceeding 10 mn on June 29, markets in Asia fell into the red while European markets stayed flat as a result of trader uncertainty. 

Now investors are no longer pondering whether a post-pandemic recovery is transpiring; rather, they are more concerned about the possibility of a second market crash occurring this year. 

How are investors reacting?  

Nine hundred UK-based professional and retail investors were surveyed on behalf of HYCM to uncover how Covid-19 was affecting their financial strategies for 2020, and the results reveal some very interesting insights into how investors are navigating market volatility. According to the survey, 30 percent of all investors say Covid-19 has radically changed their finance and investment strategies for the current financial year. Looking to the future, 31 percent of investors believe they will emerge from the coronavirus pandemic in a stronger financial position. 

But perhaps the most interesting takeaway from the survey is that a third of investors plan to put more of their capital into cash savings over the coming months. At a time when the Federal Reserve and Bank of England are seriously considering fiscal options like negative interest rates and quantitative easing to stimulate investment activity, it is surprising that so many investors are retreating to cash savings. Even with the prospect of cash savings losing value as a result of interest rates and inflation, it seems as though investors are taking solace knowing their capital is secure.   

The immediate horizon

Investors are clearly not confident that we have entered the post-pandemic recovery mentioned previously. Instead, fears of a second financial market crash in 2020 coupled with the potential long-term economic damage caused by the coronavirus have resulted in investment strategies with minimal risk exposure. This is understandable, though not the news governments in the US and the UK want to hear. 

In an attempt to stimulate economic activity, the UK and the US have set interest rates to just above 0 percent – but this has not yet had the desired effect. As a result, neither the Bank of England nor the Federal Reserved has ruled out the possibility of negative interest rates occurring at some point in 2020. The market needs to be prepared for a negative monetary policy. 

Theoretically, there is no reason for investors to hold cash savings given they will be paying interest to their lenders, though it is unlikely that negative interest rates will get passed on to savers. But low interest rates should see a surge in investment activity, particularly as investors seek to sell off very low-yielding assets.

Looking to safe and secure assets 

Stock markets are in a volatile state. Short-term gains are followed by sharp declines, making it extremely difficult to predict just how different asset prices are likely to perform over the coming months. Nonetheless, there have still been some interesting market movements to take note of. 

Take gold as an example: since the beginning of the Covid-19 pandemic, investors have been rallying to this safe haven asset and inflation hedge, leading to record-breaking prices and growing demand. We know investors theoretically rally to gold to protect their portfolio against any sudden market volatility that could incur sharp losses. Private banks have also been encouraging their high-net-worth clients to allocate gold into their portfolio. 

While gold is currently trading around $1,750 per ounce, forecasts for the precious metal are optimistic. Goldman Sachs, for instance, expects gold to set a new record high of $2,000 in the medium term. This looks to be increasing possibley in light of the current circumstances. For this reason, investors and traders should be keeping a keen eye on the performance of gold to understand how the market is reacting to news of a second virus outbreak or potential financial crash. 

We have reached a critical crossroads. While there is hope we could be witnessing the beginning of the end of the Covid-19 pandemic, recent trends suggest this might not be the case, at least for the next few months. Investors and traders need to tread lightly and ensure they are adequately prepared for the best and worst-case scenarios. 

Giles Coghlan is chief currency analyst at HYCM