The virus
Coronavirus restrictions across much of the world have been prolonged. Italy and Spain have extended the lockdown for another two weeks, India has imposed a lockdown on its 1.3bn population and, in the US, President Trump finally seems to have accepted reality and has extended restriction advice until the end of April. As much as it pains me to say it, I think we have to accept our own lockdown in the UK will be further extended at the end of the initial three-week period. Around 170 countries amounting to around 40% of the world’s population are in some sort of lockdown situation.
While the death rates in Spain and Italy still looks horrendous, they are reporting a slowdown in the rate of new infections. It is still early days but the infection rate in the UK and Ireland seems to be following a similar track – new infections are still rising but less quickly than they were. In China, restrictions are being relaxed, factories are being opened and people are returning to work. The key aspect for China, which is being watched closely by the rest of the world, is what course the virus takes now the restrictions are being relaxed; if further outbreaks occur but can be contained then it offers hope.
Government and Central Bank response
The response to this crisis by governments and central banks has been rapid and enormous. Central banks around the world are injecting nearly $6 trillion into the financial system to keep it working, while leaders of the Group of 20 major economies have pledged to inject more than $5 trillion.
It is worth remembering that the response to the global financial crisis in 2008/09 was much slower; it took the downfall of Lehman Brothers, and the realisation that the banking system could fail, to jolt policymakers into action. The U.S. Federal Reserve’s current money-printing expansion already amounts to all purchases carried out under its quantitative easing programs from 2008-14. Combined, the totals noted above are far in excess of what was delivered after the 2008 global financial crisis and the largest fiscal and monetary stimulus the world has ever seen.
These measures are necessary to keep the financial system, business and individual’s solvent but it will inevitably take time for the measures to be unwound. What this means for society and future tax rates as well as the implications for investments (for example, it could be deflationary, inflationary or both at different times) is a subject for another day.
Markets
Since my update last week there is circumstantial evidence that markets may be settling down following the initial steep falls. In the first stages of a crisis, almost everything sells off as investors search for safe havens amid the storm and rush for the liquidity of cash. The support provided by central banks has eased initial liquidity issues and credit (debt) markets are functioning more normally. Markets, while still volatile, are displaying more rationale movements with the share prices of companies deemed to be winners rising (Zoom, the online meeting provider, is up 100% year to date) and losers falling (Frasers Group/Sports Direct is down nearly -70%). There appears to be fewer ‘forced’ sellers in the market and more strategic investors, such as professional fund managers, pension funds and institutions, willing to invest.
This does not mean that there will not be further volatility. In fact, I think there may be further falls ahead as bad news on the virus, economic growth, employment and corporate profits are released. It is now almost inevitable that we will witness a large, possibly unprecedented, fall in economic growth in the next one or two quarters, along with significant falls in corporate earnings. There will be periods when markets rise, possibly significantly, during this crisis but we may need to wait longer for a more sustainable recovery. The length of the lockdowns, and the resulting impact on economies, will be a key factor markets will focus on. Eventually, however, markets will look through the short-term pain and focus on the potential for economic and corporate recovery which, as I have said before, depends on the trajectory of the virus.
I have been speaking to a lot of fund managers over the past week to get their views. The overwhelming opinion seems to be caution in the short-term, with the potential for more volatility, but optimism in the longer-term; many companies trade at historic low valuations and, assuming they can survive the lockdown, then there is the potential for strong returns in the future. Crisis’, however terrible, always create opportunities. Backing the right opportunities will be key, and this is where investing in good quality funds run by managers with strong track records will be as important as ever.
It is also worth noting that we have seen a significant strengthening in the dollar due to its status as the worlds reserve currency. This has helped to mitigate the falls in US and global funds for sterling investors.
It is highly likely that we will see dividend cuts for the first time since the global credit crisis. As companies deal with a significant fall in sales and turnover (in some cases to zero) they need to conserve cash to see them through the next few months. Whilst this will likely impact on share prices further as well as investors receiving dividends, it is a positive step if it keeps companies afloat in order to pay dividends well into the future.
And finally……
While there are clearly a lot of negatives around, there are some positives as well. Since the Government launched an appeal for 250,000 NHS volunteers, over 750,000 people have signed up. Local community groups have appeared, helping the sick and vulnerable to get prescriptions and shopping. Social media has enabled people to keep in touch with friends and relatives and spread self-help support for adults and children. The number of people in our street who went outside to clap and cheer the NHS last Thursday was a moving sight.
Unfortunately, there are always those who look to benefit from such situations. So please be very careful of scams which have increased substantially in recent weeks. Be especially careful of electronic communications and always double check before sending money or making online payments.
As always, if you have any concerns or questions about your investments, please don’t hesitate to get in touch.