The virus
I won’t spend too long on this as news outlets are flooded with information but suffice to say, the world is battling the spread of the Covid-19 virus. Countries around the world have imposed stringent restrictions on movement and closed borders in an attempt to slow the spread of the virus and flatten the curve, so that under-pressure healthcare systems can cope. Experts believe that the UK is a few weeks behind Italy which means that we will likely face our peak in 2-3 weeks’ time.
If there are any positives to take, then perhaps the experience of China is one. They have reported several consecutive days of zero locally transmitted infections with the relatively small number of new cases they have (for a country with over a billion people) coming from people returning from overseas. The government has started to lift restrictions, people are going back to work and manufacturing is coming back on line.
Government and Central Bank response
Clearly, the effects of an almost complete shutdown of economic activity, globally, will have a massive effect on economic growth. Correspondingly, the effect on corporate profits will be significant to the point where profit guidance is almost pointless; survival is the key consideration. But, the response from governments and central banks has been massive and unprecedented. Highlights include:
• A reduction in global interest rates to near zero (if not negative, in some countries)
• Massive monetary stimulus packages – central banks have re-started quantitative easing in an attempt to maintain liquidity in the financial system and are providing guarantees for bank lending.
• Fiscal stimulus – in the UK the Chancellor is guaranteeing up to 80% of employees’ wages with support about to be announced for the self employed along with loan schemes for businesses, deferring business rates and grants for small businesses. In the US, the Senate has passed a $2 trillion relief bill.
Taken together, these measures are the largest fiscal and monetary stimulus the world has ever seen. The key message from governments and central banks is that they will do “whatever it takes” to get through this period. They know that if they can support the economy and markets for long enough to get the virus under control, then there is a chance that things can return to some sort of normality without long-lasting implications.
Markets
Clearly, markets have reacted to the health and economic issues. The fall in markets has been the fastest in history but, as yet, not the deepest. Since its most recent peak on 12th February 2020, the FTSE-100 had fallen by -33% (to 23 March 2020). Volatility is higher than we have ever seen – in the last few weeks the Dow Jones index has witnessed its 5 biggest gains and 5 biggest losses in its 130-year history.
But it is not wholly negative. After the first initial falls when all stocks fell in tandem, we started to see some differentiation earlier this week with stocks expected to do well during the crisis (supermarkets, delivery companies, medical and pharmaceutical companies) rising and those more exposed (leisure, travel etc) being heavily sold off. Markets have also staged something of a relief rally in recent days with the FTSE-100 rising 14%. This is positive in that it shows that there is money available in the system and that there are investors willing to put that money to work.
It is also worth bearing in mind that all the statistics you will see on markets will show the biggest peak to trough falls. As markets staged a significant rally in 2019, the one year figures do not look quite as bad – on a total return basis (including dividends) the FTSE-100 is down -17% and the S&P500 is actually up by 0.69% (in sterling terms).
Outside of equity markets, government bonds have generally seen positive returns, corporate bonds have fallen slightly and property, so far, has held up well although we should expect further falls here due to the impact on rents. Overall, though, these non-equity assets will have helped to reduce the downside in portfolios.
However, things could well get worse before they get better and volatility will remain at elevated levels for some time. The markets, like everyone else, are working in the dark; we have never been through anything like this before so no-one knows what might happen. I suspect that we need to wait until it looks like we are through the worst of the virus before markets can stage some sort of meaningful recovery. But bear in mind that markets often move in anticipation of events and the recovery, when it comes, could be sharp.
In recent comments, Ben Bernanke (former Chairman of the US Federal Reserve who was in charge in the credit crunch and is a historical expert on the Great Depression) said:
“This has some of the same feel, some of the feel of panic, some of the feel of volatility you’re talking about. But it’s much closer to a major snowstorm or a natural disaster than it is to a classic 1930s-style depression. So, it’s quite different. Different tools are necessary. I think the public health issue is the most important one. If we can get that straight, then we know how to get the economy working again. Monetary and fiscal policy can do their thing. And we won’t have anything like the extended downturn we saw in — even I don’t think in the Great Recession {credit crunch} much less the Great Depression of the ’30s.”
Business continuity
Clearly, this is a difficult situation for everyone. However, providers of your plans are still functioning under their business continuity plans. Whilst lots of employees are working from home, business can still be submitted, changes made and valuations are unaffected. However, inevitably, some things are taking longer to process and response times may be slower, so please keep this in mind if you are thinking of taking any actions.
From a personal perspective, I am now home-based but still working, available to discuss things by phone, email or video-conference and can access systems to make changes where necessary. As I may not be able to get to the office for a while, please don’t post anything; instead you can scan or take a photo of documents and email them to me (although please be careful of personal information).
And finally……
I think in times like this it is important to focus on the things you can control – your own physical and mental health, your family etc – and try not to worry about the things you cannot control. The virus will pass and things will get back to normal, at some stage.
When we get out the other side, there will be time to re-consider the situation, your plans, your goals and objectives, any changes to your finances and how these events may have changed your views on risk. But for now, sit tight and look after yourselves.