Sentiment improved, but uncertainty was under consideration

21st May, 2020

Market rebounded strongly in April after the severe shock, with some major countries saw daily new infection rates started to fall and were planning to gradually reopen their economies. Although damage caused by the economic shutdown was significant, but so was the stimulus measures which restored some positive sentiment to markets. Volatility feel down from extreme levels. The S&P 500 gained 12.68% over the month, and had recovered close to 60% of its prior decline. Fixed Income markets also rallied as central banks committed to purchase more government and corporate bonds. Despite April’s market rebound, considerable uncertainty remains over the trajectory of global growth over the coming quarter. The extent to which economies could successfully reopen and the risk of further recession were two important factors.

The US economy shrank by an annualized 4.8 percent in the first quarter of 2020, ending the longest period of expansion in the country's history. It was the steepest pace of contraction in GDP since the last quarter of 2008, much worse than market consensus of a 4.0 percent slump. The extent of the economic deterioration due to the shutdown was evident in the April Flash composite Purchasing Managers’ Index (PMI), which plunged to 27.4. Retail sales also fell 8.4% in March. Fiscal stimulus measures launched by Congress were enormous, but more may still be required. Downside risk was still high because investor might fear of a permanent destruction of demand. A cautious stance for risky assets investment was always needed, especially as the implied upside to downside ratio tail-based Sharpe ratio for US equites was at 0.95. With it siting below average level of 1.1, equities downside risk was more than its average level, indicating a lesser potential for gains going forward than loss.