Summary

  • Financial markets have been devastated by the Covid-19 pandemic with falls of up to a third in the major stock market indices acknowledging that we are already in a very deep economic recession.

  • The policy response from Central Banks and Governments has been immense and on a scale never seen before; attempting to ensure this is a V-shaped recovery into the end of the year rather than a long-term depression.

  • Markets continue to trade wildly with no floor yet in sight, trying to find a balance between the fear of the pandemic spreading and the hope that it will eventually subside, with the policy response kicking in quickly and effectively.

  • There has been a rush to ‘safe haven’ assets such as Gold and Government Bonds, though corporate bonds have produced negative returns as credit spreads, a measure of risk, have widened significantly as investors seek liquidity and quality.

  • Safe haven currencies have been strong, notably the Japanese yen and the US dollar but sterling has been weak.

  • The UK Commercial Property sector is in disarray with all the daily dealt ‘bricks and mortar’ funds now closed to redemptions and massive discounts to NAV for the REITs.

  • The oil price has fallen a staggering 65% due to the collapse in global demand at the same time as a fall out between OPEC and Russia has led to a flood of supply.

  • In this market environment our first concern is to avoid making short-term ‘own goal’ errors on portfolios. We need to make considered changes to make sure we get it right for the new and very different long term.

This is the 54th Investment Strategy I’ve written and by far the most sombre. I thought the 2008 Great Financial Crisis was to have been the ‘once in a generation’ event that would threaten our long term prosperity but this is far worse because of the threat to our health and that of our families. Our lives have changed fundamentally and may do so for many years in ways we cannot yet foresee. As we sit  in our homes, cherishing our daily outing, we are though inspired by the work of the NHS, by workers in key industries and by the strength of the community spirit in our neighbourhoods which is bringing so much comfort as we face the worst weeks ahead. The human spirit a wonderful thing, a small but very bright and shining ray of light in the darkest of clouds.

The format of this newsletter is different to previous quarters. I’m not going to write individual regional reviews because it is a ‘one story’ market with just the one driver of prices across all global stock markets and economies. Instead, I’ll discuss the market outlook in both the short and longer term and our strategy for managing your wealth in these difficult times.

Macro….praying for the V

Whilst there is uncertainty everywhere one thing is a given, we are already in a massive recession with economic growth in this quarter likely to see a fall of up to 30% in some countries. The global economy is suffering simultaneously from both a huge demand shock and a huge supply shock. The world is in lock-down so no spending on anything other than essentials; food, personal care goods and a Netflix subscription, whilst supply is collapsing because businesses can no longer function.

The policy response from Central Banks and Governments has been unprecedented in peace time. Central Banks have slashed interest rates to near zero along with huge ‘quantitative easing’ packages of government, mortgage backed and corporate bond buying that will provide a huge wave of liquidity to the economy and to the financial system. In 2008 we feared for a meltdown in the banking system, but this is something we should not fear this time. Even more unprecedented has been the monumental fiscal packages, amounting to around 10% of annual GDP in the US and UK to support businesses, jobs and households.

The initial market reaction to the policy response was a disdainful ‘Central Banks can’t manufacture a vaccine’ but the scale and global co-ordination of monetary and fiscal policy has helped to stabilise markets. The fiscal backstop is being funded by the monetary backstop i.e. the Central Banks are underwriting the financial system and providing the money for governments to spend in the ‘real economy’. The term ‘helicopter money’ has been thrown around for some time but this is surely it, you can’t get more helicopter than Trump mailing $1200 cheques direct to households.

The key issue is whether this huge policy response will actually work and as yet we can’t know because the scale of the pandemic and the length of global lock-down are also unknowns. The markets appear to be pricing in an economic recovery beginning in the autumn, and hoping and praying that it will be V shaped with a very strong rebound as huge pent-up demand kicks in. The alternative  is that the pandemic lasts for longer or, worse, returns in China and subsequently everywhere else. That is not priced into markets. There will be the usual argument that in time all this ‘helicopter’ money will lead to inflation but this didn’t happen after 2008 and is unlikely to happen this time either, at least for many years. Borrowing costs could stay low for a generation.

The outlook for Europe, and hence the euro, is particularly uncertain. With no common fiscal policy and a vast disparity in the state of government finances a common approach to recovery is further away than ever. The ECB can now buy an unlimited amount of every country’s bonds but at the fiscal level it has become everyman for himself. Good if your business is based in Aachen or Amsterdam, less so if it is in Alicante, Ancona or Athens. In her prime, Frau Merkel may have forced through some jointly financed ‘coronabonds’ but Germany has now moved markedly to the populist right. We may have nothing to Brexit from, if and whenever that ship sets sail again.

All Change

Everything is going to change. We need to deal with the here and now, that is obvious, but the global economy, and the way we live our lives, is going to be very different. People, and countries, are going to be far more cautious because the pandemic has exposed how we lack self-sufficiency and how  dependent we are on global supply chains. Some companies and industries will go to the wall or never bei the same again. Travel, tourism and leisure account for around 10% of global GDP employing 10% of the global workforce. We’ll fly and travel and shop again, but will it  ever be the same? What will also change is our attitude to public spending and the role of the state in our lives; out of necessity a Tory government is part- nationalising swathes of the economy. As we emerge from the pandemic this will be rolled back, but the damage done to the British economy and the fabric of our lives means that much of this may remain for longer than we think. Welcome back British Rail. A positive change is the recognition that the flexibility and technological sophistication of our modern world are playing a key part in preventing an immediate fall into an economic depression. Businesses are coping through the use of email, the internet, online conferencing (and virtual coffee breaks!) and phone apps I’ve never heard of. Remote working has been shown to be the way of the future.

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Conclusion…

The markets are performing a balancing act between the spread of the pandemic and the perception of whether the huge policy response will be enough to prevent a massive short term recession turning into something longer and deeper. The next few weeks are critical as we get a sense of whether the lock-down policies in Italy, Spain and France are having an effect as the expected peak of active infection rates is reached. Markets will pay particular attention to the US where the response has been fragmented and delayed with the risk of a truly dreadful tragedy, something that will find its way into lower stock prices. I entitled my market note of a couple of weeks ago ‘All Things Must Pass’ and in these terrible times this is something I still believe, though with a heavy heart at the human cost.

In a world that is fearful let us be inspired by the love and strength we see around us, count the blessings we have, enjoy the simple pleasures where we can, and try to look forward to the better days ahead. Above all, our thoughts are with you and your families and we wish you all the sincerest of good health.

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