Equity and bond market

2020 was a period of extreme volatility reflecting the market’s reaction to the outbreak of the COVID-19 pandemic. According to the World Health Organization (WHO), the origins of the pandemic have been traced to the city of Wuhan in the Hubei province of central China, where the first cases of this disease were diagnosed on 17 November 2019. The fear of disruptions to international supply chains and of the resulting global recession has translated into a more restrictive approach to risk by global investors. As a result, in 2020, a sell-off wave passed through all key equity markets, which changed direction only at the end of the year.

In early 2020, global equity markets continued their robust gains generated in 2019. Stock market indices kept breaking new all-time peaks, chiefly due to the surge in optimism regarding high-tech companies. Another contributing factor was the improvement in trade relations between the United States and China. However, the outbreak of the COVID pandemic sent a major shock-wave across the financial markets at the beginning of March 2020. On 10 March, an enormously rapid sell-off was triggered on stock exchanges in the United States. The S&P 500, Dow Jones and Nasdaq indices lost more than 7% at the close of the day’s session. Almost all major global stock exchanges were also experiencing declines. In Q1 2020, The aggregate weekly losses reached a whopping 20-30%.

Source: www.infostrefa.com, www.msci.com 

US fed funds rate (upper limit)

Source: https://fred.stlouisfed.org/

A rebound and strong upward corrections took place already in Q2 2020, triggered largely by stimulation measures taken by governments and central banks. The world’s largest stimulus package worth USD 2 trillion was adopted in the United States (approx. 10% of GDP). The value of aid programs for individual countries in Europe was also impressive. It ranged from several dozen to several hundred billion euros. The largest chunk of activities in this area was focused on the protection of jobs, the provision of support to micro, small and medium-sized enterprises and to self-employed individuals.

Additional interest rate cuts served as another key element intended to stimulate economies across the world. The first central bank to take such a step as early as in 2019 was the central bank of China – the country where the pandemic began. However, global investors set their eyes chiefly on the measures adopted by the Fed², which already in Q1 2020 cut its interest rates twice, bringing them down almost to zero.

The stimulus measures provided a significant degree of support to the financial markets. In parallel, a number of steps were taken with a view to reducing the rate of dissemination of the infections, which coincided with the earliest reports on the progress of work on the vaccine. Consequently, at the end of Q1 2020, this favorable event prompted investors to take long positions in equities. After the rapid sell-off in mid-March, the rebound took over and continued in the months to follow. In Q3 2020, the S&P 500 and the Nasdaq Composite set new all-time peaks.

The beginning of Q4 2020 brought another sharp spike in COVID-19 cases, which translated into uneasy moods associated with the extent of another upcoming lockdown³. Controversies were also growing around the presidential election in the United States, which lasted until November, when the victory of Joe Biden was announced. Subsequently, a growth trend returned to the markets, additionally supported by new information about the high effectiveness of several vaccines against the coronavirus causing COVID-19. In 2020, the MSCI ACWI – All Country World Index⁴  grew 14.3% y/y, even though cumulative decreases in Q1 2020 reached as much as 30%.

WIG20 vis-à-vis MSCI EM

Source: www.infostrefa.com, www.msci.com

The development of the pandemic also affected emerging markets. Similarly to the behavior of equities across the world, emerging markets rebounded strongly following their steep decline in Q1 2020 and reached levels that were much higher than those attained before the sell-off wave. The MSCI EM5 index⁵ improved 15.8% y/y in 2020. In particular, the jump from the lowest level, recorded on 23 March 2020 (758 points), to the 31 December 2020 listing (1,291 points) was above 70%. These increases were not reflected in the values attained by the WIG20 index, which had historically demonstrated a strong correlation with the MSCI EM index. In 2020, WIG20 lost 7.7% y/y. According to analysts, this was caused, among other factors, by lingering risks in the banking and fuel sectors. In 2020, these two sectoral indices generated over PLN 86 billion in revenue, accounting for more than a third of revenue generated by all WIG20 companies. This divergence may have also been a result of Poland’s declining share in MSCI EM (being overtaken by China). At the end of 2020, this share stood at 0.6%, whereas 5 years ago it was approximately 1.5%.

Treasury bonds (10-year)

Source: www.infostrefa.com, www.stooq.com

¹ https://www.who.int/emergencies/diseases/novel-coronavirus-2019

² The Fed – the Federal Reserve System – acts as the central bank of the United States

³ Lockdown – the term applied to describe the restrictions imposed in connection with the announcement of the COVID-19 pandemic in 2020. It involves a prohibition of unconstrained movement of people and an order to stay at home (with certain exceptions). It also refers to restrictions on the operation of the economy

⁴ As at the end of December 2020, the index was composed of stocks from 50 countries, 23 of which were classified as developed markets and the remaining 27 were classified as emerging markets

⁵ Index of emerging markets – that is markets in countries with rapid economic growth and high levels of investment. For this reason, they are becoming an attractive place for investing capital, especially on securities markets, usually offering potentially higher rates of return than the markets of highly developed nations. This group of countries includes Poland, but also Turkey and the BRIC countries: Brazil, Russia, India, China

⁶ The BSP Index is an income-based index that takes into account changes in bond prices, the value of accrued interest and the revenue from reinvested coupons. The index portfolio includes zero-coupon and fixed-interest rate bonds denominated in Polish zloty