Impact of Unprecedented Levels of Unemployment During Covid-19 Crisis

Ray Calleja

An article written by Ray Calleja: Head – Private Clients, MeDirect

Over the last few weeks we witnessed the swift decline in stocks and the start of the coronavirus pandemic. Volatility has been the name of the game. We did see some days where stocks try to rally back after their free fall but the situation is still developing and there is still a long way to go before things start to get back to normal again. Some positive news came from the Asian markets, which have been gaining strength as the number of new cases and fatalities slowly began to drop in that part of the world.

The U.S., on the other hand, is still coming up with new estimates every day about the spread of COVID-19. Last week, as stocks rallied, there was uncertainty about how many people would be impacted. Congress and then the senate approved a $2 trillion stimulus package and hundreds of billions of dollars in monetary policy pledged to help the economy. Earlier this week we learned that there are over 200,000 cases in the U.S. and the number of fatalities could reach 240,000. Investors did not like that news and the markets fell again.

In this article we will take a closer look at one of the most damaging aspects of this pandemic – rising unemployment. In just the last two weeks, more than 10 million Americans have filed for unemployment, according to the Labour Dept. That wipes out nearly all the job gains made since the 2008–09 crisis. Thankfully it is expected that many of those will come back once this health crisis abates, but some industries could have been changed permanently by this pandemic.

Economists expect a loss of at least 100,000 jobs in the US for March, but it could be much worse. The next few months will reveal the extent of the damage to the labour market as the Federal Reserve says some 43 million Americans may lose their jobs in this crisis. That’s an incredibly big number and it reflects the size of the American workforce, which stood at 143 million people in February.

The consolation is that the US has seen unemployment shocks before and bounced back. In 1956 during the Steel Strike more than 800,000 people lost their jobs then hiring came back very strongly.

In Europe at least one million people have lost their jobs during the past two weeks according to the latest data from the European Trade Union Confederation (ETUC). The startling figure comes from reports submitted by trade unions across Europe, and only includes contract workers who have applied for unemployment benefits. The International Labour Organization estimates that almost 25 million jobs could be lost worldwide due to the coronavirus pandemic. 

We have never seen the global economy shut down in such a co-ordinated way in such a short period of time. As a result a large number of people have lost their jobs at the same time. And that is how unemployment figures have risen so dramatically.

And since this is very significant that is why we are seeing so many stimulus packages in the biggest economies across the world including all G20 countries. America’s stimulus is the biggest in the world at 10% of its GDP. This is a reflection of how significant a crisis this is and it is no wonder that world governments are acting as decisively as this. They are making different forms of funding to the system and to businesses to try and avoid companies going to the wall and ultimately save jobs.

Governments across Europe are using public money to try to secure jobs through the crisis by paying or reimbursing companies that have seen their revenues dry up. Their number one goal is to keep employees on the payroll so they can resume working when businesses re-open.

This week the president of the European Commission, Ursula von der Leyen spoke about the EU’s plans to borrow and spend €100bn to stop firms in the bloc laying off staff during this pandemic. The EU’s executive branch is proposing to borrow from the international markets and make loans to member state governments to allow them to fund short-time working schemes, under which employees work reduced hours with some of their salary paid by the state.

The world has learnt its lessons from the 2008/2009 financial crisis and that led to a structural change in the banking system. There is nowadays a much better capitalised banking system, much better than there was in 2007. It is therefore expected that the impact of the coronavirus crisis on the banking sector will be manageable this time.

As the virus crisis continues to unfold, it is clear that the necessary responses that are required will continue to be taken and eventually there should be a recovery.

These temporary packages come at a steep cost to the taxpayer but, if successful, they will help economies recover more quickly when the outbreak recedes.

Experts don’t think that the world will be in a permanent slump but people just don’t know when that recovery is going to happen. However, the significant level of the stimulus that is being provided across the globe should match the significant increase in the unemployment figures that we are witnessing just now.

 


The above is for informative purposes only and should not be construed as an offer to sell or solicitation of an offer to subscribe for or purchase any investment. The
information provided is subject to change without notice and does not constitute investment advice. MeDirect Bank (Malta) plc has based this document on information
obtained from sources it believes to be reliable but which have not been independently verified and therefore does not provide any guarantees, representations or warranties.
MeDirect Bank (Malta) plc, company registration number C34125, is licensed by the Malta Financial Services Authority under the Banking Act (Cap. 371) and the Investment Services
Act (Cap. 370).

medirectalk featuring Leo Niers and Elsa Goldburg – Franklin Templeton

On Thursday 26th March 2020, MeDirect held its third edition of medirectalk, however this was the first medirectalk of its kind to be held online, given the current situation and the necessary social distancing requirements. Past events were held in a typical seminar set-up, with investors and members of the public attending the event, whilst the proceedings were broadcast on Facebook live. medirectalk is a series of seminars featuring several financial experts and asset managers on market and investment updates. This edition featured Bill Francis, Leo Niers and Elsa Goldburg from the leading fund house, Franklin Templeton.

Franklin Templeton is a global investment firm that was founded in New York City in 1947 and is currently listed on the New York Stock Exchange. On the 18th of February 2020 Franklin Templeton announced that it had entered into a definitive agreement to acquire Legg Mason, Inc. This acquisition will establish Franklin Templeton as one of the world’s largest independent, specialized global investment managers with a combined $1.5 trillion in assets under management. Their aim is to deliver long term performance to help investors meet their goals. Franklin Templeton offers a wide variety of global funds and portfolios. The funds which MeDirect offer can be found here.

The event began with an introduction by Ingrid Micallef, Senior Manager – Wealth Products at MeDirect, who highlighted the agenda and the speakers’ background.

The guest speakers discussed the coronavirus’ effects on the financial markets and the current volatility we are experiencing. Leo Niers went on to discuss the current shocks in the investments world with a historic perspective. He also spoke about the role emotions play in affecting decision-making abilities in the world of investments as well as outlining various strategies to better cope with market volatility. Furthermore, Elsa Goldberg gave a global macro overview of the current economic, political and financial market conditions. She focused on the growing global risks and the intensification of worldwide uncertainty over the past decades also outlining investment strategies that could be adopted in times of crisis.

During the event, participants interacted with the two speakers and asked questions by using the chat facility on the online platform.

“MeDirect has always been at the forefront of providing investors with market information from high-quality and calibre speakers through its medirectalk events, as well as via its daily updates available on MeDirect’s website and social media platforms,” said Nicol La Ciura, Group Head of Wealth Products at MeDirect.

You can watch the third edition of medirectalk featuring Leo Niers and Elsa Goldburg here.


The information given during this seminar is being provided by Franklin Templeton. The information contained in this talk is for general information purposes only and is neither intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available during the seminar is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness. The financial instruments discussed may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

The financial instruments discussed in this seminar may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in any of the products discussed you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Franklin Templeton Insights: Focusing on High-Quality Opportunities

Despite the dire outlook for natural resources companies due to various coronavirus-related concerns, Franklin Equity Group’s Fred Fromm explains why he thinks select companies are in much better shape than during the last economic downturn. He also shares why he is paying particular attention to liquidity and the ability of companies to survive until supply and demand balances improve.

As COVID-19 continues to spread, and governments take increasingly aggressive actions to contain the virus, the short-term outlook for the global economy and commodity demand has deteriorated significantly. In our view, the situation remains fluid, and it is difficult to predict the duration and ultimate impact of the virus.

Commodity demand has suffered and will continue to do so as economic activity around the world slows considerably, and inventories will climb as a result. When combined with the potential for persistent changes in consumer behaviour following the outbreak, the situation could maintain pressure on commodity prices for several months and perhaps longer.

That said, a rapid response by select energy and raw materials producers has resulted in supply curtailments for some commodities and has partially offset these adverse demand factors. Companies have begun reining in investment to conserve cash, and some countries are shuttering operations to limit the spread of the virus. In some cases, oil producers will be forced to reduce or cease production for lack of storage capacity in the face of demand weakness.

Crude oil will be one of the most heavily impacted commodities as prices received another blow in March when Saudi Arabia and Russia failed to agree on supply reductions in an effort to offset demand destruction resulting from government efforts to contain COVID-19. On the contrary, apparently in response to Russia’s lack of cooperation, Saudi Arabia abruptly announced a plan to increase production and exports while lowering official selling prices to customers in an effort to take market share. This action was announced despite indications that a deal could be reached and a clear necessity to reduce supply in order to avoid swelling global inventory at a time when supplies are already ample.

Both of these actions were significant and unexpected deviations from prior curtailment policies that appeared to have ended a three-year coalition and had an immediate negative impact on oil prices and related securities. Ultimately, we believe this new unconstrained strategy will inflict significant fiscal damage on Organization of Petroleum Importing Countries (OPEC) countries and Russia. Their heavily oil-dependent government budgets cannot achieve balance with oil prices hovering around the 18-year lows we were seeing as April got underway.

In our view, the potential still exists for an agreement to be reached and recent news stories appear to suggest that may be the case. However, if this does not occur, US production growth will likely continue to decline, after the most recent available data shows production fell in December and January following a prolonged period of rapid growth.

The global macroeconomic outlook, in addition to the recovery in specific sectors, will be critical in determining the shape of the rebound in oil demand, which will likely be down sharply in April and May, though it could have a strong seasonal rebound in the second half of the year. This, in turn, will inform the necessary level of oil production to balance supply and demand and allow prices to return to healthier levels.

Investment Implications

As a result of this unprecedented combination of demand and supply shocks, investing in commodity-linked equities is particularly challenging at this time. However, we expect the same basic tenets of natural resources sector investing to hold true over the long term—namely, the necessity for commodity prices to remain at levels that incentivise investment in resources that deplete over time.

In our view, it is of critical importance to determine the commodity price level discounted in share prices. Making these determinations is not an exact science, which is why we use ranges that have proven to be a fairly accurate indication of how investors value the securities over time. Although periods of security-price deviation from these “intrinsic value” levels can occur, they usually do not persist for long and can present attractive buying opportunities.

We believe this is the situation we find ourselves in today, particularly with energy-focused stocks appearing to reflect US benchmark oil prices below US$35 per barrel. In our view, this price level will result in a continued decline in US onshore production (and likely that of other countries). US shale oil production now represents about 10% of total global supply, and faces significantly higher-than-average decline rates (the rate at which production of wells or oil basins decline annually).

Several exploration and production companies have already announced significant spending declines on the order of 30%–40% from previous guidance, which was already expected to be down 10% from 2019. In addition, the larger energy conglomerates (within the integrated oil and gas industry) are beginning to provide similar updates with more moderate estimated declines in the 20%-25% range, though their reduction in US spending plans will likely be much steeper. This may not matter near term, while demand is weak or falling under the extraordinary circumstances of COVID-19. However, as the world economy recovers, we believe we are likely to see oil demand rebound with a concomitant rise in prices and related equities—and perhaps strongly.

Despite the dire outlook resulting from coronavirus-related concerns, energy fundamentals at the company and industry levels have seen marked improvement, with operations, balance sheets and hedging positions in much better shape than during the last downturn from June 2014 to January 2016.

In addition, there was a significant curtailment of US drilling and completion activity in late 2019 that has extended into 2020, and has begun to accelerate. As US production declines, it will herald a very important reversal in trends witnessed over the past couple years as US production expanded at a rapid pace and pressured oil prices.

According to our analysis, many metals and mining companies, while also susceptible to the unprecedented impact to the world economy, are in strong positions given management teams’ reticence to invest in large projects over the past several years, which led to a strengthening in balance sheets. In our view, well-capitalised companies should therefore be able to withstand the short-term demand shock and may benefit from various stimulus measures that governments employ to help restart economic activity.

Similar to our experience during the global financial crisis in 2008, we believe consolidating holdings into the highest-quality companies while seeking to increase exposure on weakness will prove to be the right approach, even though it may have a negative impact on performance in the short term.


 

Franklin Templeton Key risks & Disclaimers:

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors or general market conditions. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Growth stock prices may fall dramatically if the company fails to meet projections of earnings or revenue; their prices may be more volatile than other securities, particularly over the short term. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. Investing in foreign companies involves special risks, including currency fluctuations and political uncertainty.



MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Impact of Unprecedented Levels of Unemployment During Covid-19 Crisis

Ray Calleja

An article written by Ray Calleja: Head – Private Clients, MeDirect

Over the last few weeks we witnessed the swift decline in stocks and the start of the coronavirus pandemic. Volatility has been the name of the game. We did see some days where stocks try to rally back after their free fall but the situation is still developing and there is still a long way to go before things start to get back to normal again. Some positive news came from the Asian markets, which have been gaining strength as the number of new cases and fatalities slowly began to drop in that part of the world.

The U.S., on the other hand, is still coming up with new estimates every day about the spread of COVID-19. Last week, as stocks rallied, there was uncertainty about how many people would be impacted. Congress and then the senate approved a $2 trillion stimulus package and hundreds of billions of dollars in monetary policy pledged to help the economy. Earlier this week we learned that there are over 200,000 cases in the U.S. and the number of fatalities could reach 240,000. Investors did not like that news and the markets fell again.

In this article we will take a closer look at one of the most damaging aspects of this pandemic – rising unemployment. In just the last two weeks, more than 10 million Americans have filed for unemployment, according to the Labour Dept. That wipes out nearly all the job gains made since the 2008–09 crisis. Thankfully it is expected that many of those will come back once this health crisis abates, but some industries could have been changed permanently by this pandemic.

Economists expect a loss of at least 100,000 jobs in the US for March, but it could be much worse. The next few months will reveal the extent of the damage to the labour market as the Federal Reserve says some 43 million Americans may lose their jobs in this crisis. That’s an incredibly big number and it reflects the size of the American workforce, which stood at 143 million people in February.

The consolation is that the US has seen unemployment shocks before and bounced back. In 1956 during the Steel Strike more than 800,000 people lost their jobs then hiring came back very strongly.

In Europe at least one million people have lost their jobs during the past two weeks according to the latest data from the European Trade Union Confederation (ETUC). The startling figure comes from reports submitted by trade unions across Europe, and only includes contract workers who have applied for unemployment benefits. The International Labour Organization estimates that almost 25 million jobs could be lost worldwide due to the coronavirus pandemic. 

We have never seen the global economy shut down in such a co-ordinated way in such a short period of time. As a result a large number of people have lost their jobs at the same time. And that is how unemployment figures have risen so dramatically.

And since this is very significant that is why we are seeing so many stimulus packages in the biggest economies across the world including all G20 countries. America’s stimulus is the biggest in the world at 10% of its GDP. This is a reflection of how significant a crisis this is and it is no wonder that world governments are acting as decisively as this. They are making different forms of funding to the system and to businesses to try and avoid companies going to the wall and ultimately save jobs.

Governments across Europe are using public money to try to secure jobs through the crisis by paying or reimbursing companies that have seen their revenues dry up. Their number one goal is to keep employees on the payroll so they can resume working when businesses re-open.

This week the president of the European Commission, Ursula von der Leyen spoke about the EU’s plans to borrow and spend €100bn to stop firms in the bloc laying off staff during this pandemic. The EU’s executive branch is proposing to borrow from the international markets and make loans to member state governments to allow them to fund short-time working schemes, under which employees work reduced hours with some of their salary paid by the state.

The world has learnt its lessons from the 2008/2009 financial crisis and that led to a structural change in the banking system. There is nowadays a much better capitalised banking system, much better than there was in 2007. It is therefore expected that the impact of the coronavirus crisis on the banking sector will be manageable this time.

As the virus crisis continues to unfold, it is clear that the necessary responses that are required will continue to be taken and eventually there should be a recovery.

These temporary packages come at a steep cost to the taxpayer but, if successful, they will help economies recover more quickly when the outbreak recedes.

Experts don’t think that the world will be in a permanent slump but people just don’t know when that recovery is going to happen. However, the significant level of the stimulus that is being provided across the globe should match the significant increase in the unemployment figures that we are witnessing just now.

 


The above is for informative purposes only and should not be construed as an offer to sell or solicitation of an offer to subscribe for or purchase any investment. The
information provided is subject to change without notice and does not constitute investment advice. MeDirect Bank (Malta) plc has based this document on information
obtained from sources it believes to be reliable but which have not been independently verified and therefore does not provide any guarantees, representations or warranties.
MeDirect Bank (Malta) plc, company registration number C34125, is licensed by the Malta Financial Services Authority under the Banking Act (Cap. 371) and the Investment Services
Act (Cap. 370).

medirectalk featuring Leo Niers and Elsa Goldburg – Franklin Templeton

On Thursday 26th March 2020, MeDirect held its third edition of medirectalk, however this was the first medirectalk of its kind to be held online, given the current situation and the necessary social distancing requirements. Past events were held in a typical seminar set-up, with investors and members of the public attending the event, whilst the proceedings were broadcast on Facebook live. medirectalk is a series of seminars featuring several financial experts and asset managers on market and investment updates. This edition featured Bill Francis, Leo Niers and Elsa Goldburg from the leading fund house, Franklin Templeton.

Franklin Templeton is a global investment firm that was founded in New York City in 1947 and is currently listed on the New York Stock Exchange. On the 18th of February 2020 Franklin Templeton announced that it had entered into a definitive agreement to acquire Legg Mason, Inc. This acquisition will establish Franklin Templeton as one of the world’s largest independent, specialized global investment managers with a combined $1.5 trillion in assets under management. Their aim is to deliver long term performance to help investors meet their goals. Franklin Templeton offers a wide variety of global funds and portfolios. The funds which MeDirect offer can be found here.

The event began with an introduction by Ingrid Micallef, Senior Manager – Wealth Products at MeDirect, who highlighted the agenda and the speakers’ background.

The guest speakers discussed the coronavirus’ effects on the financial markets and the current volatility we are experiencing. Leo Niers went on to discuss the current shocks in the investments world with a historic perspective. He also spoke about the role emotions play in affecting decision-making abilities in the world of investments as well as outlining various strategies to better cope with market volatility. Furthermore, Elsa Goldberg gave a global macro overview of the current economic, political and financial market conditions. She focused on the growing global risks and the intensification of worldwide uncertainty over the past decades also outlining investment strategies that could be adopted in times of crisis.

During the event, participants interacted with the two speakers and asked questions by using the chat facility on the online platform.

“MeDirect has always been at the forefront of providing investors with market information from high-quality and calibre speakers through its medirectalk events, as well as via its daily updates available on MeDirect’s website and social media platforms,” said Nicol La Ciura, Group Head of Wealth Products at MeDirect.

You can watch the third edition of medirectalk featuring Leo Niers and Elsa Goldburg here.


The information given during this seminar is being provided by Franklin Templeton. The information contained in this talk is for general information purposes only and is neither intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available during the seminar is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness. The financial instruments discussed may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

The financial instruments discussed in this seminar may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in any of the products discussed you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Franklin Templeton Insights: Focusing on High-Quality Opportunities

Despite the dire outlook for natural resources companies due to various coronavirus-related concerns, Franklin Equity Group’s Fred Fromm explains why he thinks select companies are in much better shape than during the last economic downturn. He also shares why he is paying particular attention to liquidity and the ability of companies to survive until supply and demand balances improve.

As COVID-19 continues to spread, and governments take increasingly aggressive actions to contain the virus, the short-term outlook for the global economy and commodity demand has deteriorated significantly. In our view, the situation remains fluid, and it is difficult to predict the duration and ultimate impact of the virus.

Commodity demand has suffered and will continue to do so as economic activity around the world slows considerably, and inventories will climb as a result. When combined with the potential for persistent changes in consumer behaviour following the outbreak, the situation could maintain pressure on commodity prices for several months and perhaps longer.

That said, a rapid response by select energy and raw materials producers has resulted in supply curtailments for some commodities and has partially offset these adverse demand factors. Companies have begun reining in investment to conserve cash, and some countries are shuttering operations to limit the spread of the virus. In some cases, oil producers will be forced to reduce or cease production for lack of storage capacity in the face of demand weakness.

Crude oil will be one of the most heavily impacted commodities as prices received another blow in March when Saudi Arabia and Russia failed to agree on supply reductions in an effort to offset demand destruction resulting from government efforts to contain COVID-19. On the contrary, apparently in response to Russia’s lack of cooperation, Saudi Arabia abruptly announced a plan to increase production and exports while lowering official selling prices to customers in an effort to take market share. This action was announced despite indications that a deal could be reached and a clear necessity to reduce supply in order to avoid swelling global inventory at a time when supplies are already ample.

Both of these actions were significant and unexpected deviations from prior curtailment policies that appeared to have ended a three-year coalition and had an immediate negative impact on oil prices and related securities. Ultimately, we believe this new unconstrained strategy will inflict significant fiscal damage on Organization of Petroleum Importing Countries (OPEC) countries and Russia. Their heavily oil-dependent government budgets cannot achieve balance with oil prices hovering around the 18-year lows we were seeing as April got underway.

In our view, the potential still exists for an agreement to be reached and recent news stories appear to suggest that may be the case. However, if this does not occur, US production growth will likely continue to decline, after the most recent available data shows production fell in December and January following a prolonged period of rapid growth.

The global macroeconomic outlook, in addition to the recovery in specific sectors, will be critical in determining the shape of the rebound in oil demand, which will likely be down sharply in April and May, though it could have a strong seasonal rebound in the second half of the year. This, in turn, will inform the necessary level of oil production to balance supply and demand and allow prices to return to healthier levels.

Investment Implications

As a result of this unprecedented combination of demand and supply shocks, investing in commodity-linked equities is particularly challenging at this time. However, we expect the same basic tenets of natural resources sector investing to hold true over the long term—namely, the necessity for commodity prices to remain at levels that incentivise investment in resources that deplete over time.

In our view, it is of critical importance to determine the commodity price level discounted in share prices. Making these determinations is not an exact science, which is why we use ranges that have proven to be a fairly accurate indication of how investors value the securities over time. Although periods of security-price deviation from these “intrinsic value” levels can occur, they usually do not persist for long and can present attractive buying opportunities.

We believe this is the situation we find ourselves in today, particularly with energy-focused stocks appearing to reflect US benchmark oil prices below US$35 per barrel. In our view, this price level will result in a continued decline in US onshore production (and likely that of other countries). US shale oil production now represents about 10% of total global supply, and faces significantly higher-than-average decline rates (the rate at which production of wells or oil basins decline annually).

Several exploration and production companies have already announced significant spending declines on the order of 30%–40% from previous guidance, which was already expected to be down 10% from 2019. In addition, the larger energy conglomerates (within the integrated oil and gas industry) are beginning to provide similar updates with more moderate estimated declines in the 20%-25% range, though their reduction in US spending plans will likely be much steeper. This may not matter near term, while demand is weak or falling under the extraordinary circumstances of COVID-19. However, as the world economy recovers, we believe we are likely to see oil demand rebound with a concomitant rise in prices and related equities—and perhaps strongly.

Despite the dire outlook resulting from coronavirus-related concerns, energy fundamentals at the company and industry levels have seen marked improvement, with operations, balance sheets and hedging positions in much better shape than during the last downturn from June 2014 to January 2016.

In addition, there was a significant curtailment of US drilling and completion activity in late 2019 that has extended into 2020, and has begun to accelerate. As US production declines, it will herald a very important reversal in trends witnessed over the past couple years as US production expanded at a rapid pace and pressured oil prices.

According to our analysis, many metals and mining companies, while also susceptible to the unprecedented impact to the world economy, are in strong positions given management teams’ reticence to invest in large projects over the past several years, which led to a strengthening in balance sheets. In our view, well-capitalised companies should therefore be able to withstand the short-term demand shock and may benefit from various stimulus measures that governments employ to help restart economic activity.

Similar to our experience during the global financial crisis in 2008, we believe consolidating holdings into the highest-quality companies while seeking to increase exposure on weakness will prove to be the right approach, even though it may have a negative impact on performance in the short term.


 

Franklin Templeton Key risks & Disclaimers:

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

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What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors or general market conditions. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Growth stock prices may fall dramatically if the company fails to meet projections of earnings or revenue; their prices may be more volatile than other securities, particularly over the short term. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. Investing in foreign companies involves special risks, including currency fluctuations and political uncertainty.



MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

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