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.
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.