Another week and the thesaurus is starting to run dry of synonyms to explain how unique the current global situation is.
The UK now joins other countries around the world putting its citizens on lockdown, central banks across the globe have promised an unlimited supply of money and the USA now has the most number of reported cases of COVID-19 of any country1.
The rollercoaster of global stock markets showed signs that the measures taken by governments and central banks had provided some support and some reassurance with many, including our clients, asking whether or not we had reached the bottom. Although we have no crystal ball, we think the answer is; not quite yet. Despite stock markets being forward-looking, the sheer scale of what we are seeing is difficult for markets and market participants to predict.
The economic data usually lags behind markets moves and economic shocks by a few months and although we have seen particularly poor data such as the ‘US Initial Jobless Claims’ (the measure of the number of people who filed for unemployment insurance for the first time during the past week) and European Purchasing Managers Index (PMI) figures ( a measure of the prevailing direction of economic trends in manufacturing)2, it is still too early to see the true scale of what we face. As such we continue to reiterate our firm stance on staying invested, staying calm and focusing on the future.
This is a multi-faceted crisis, unlike any that has gone previously. However, history will tell us that all the crises that came before were unlike anything that came before them, so hopefully, that offers some solace but also the hope that lessons can be taken from this too.
When trying to ascertain when the recovery might happen, there are three things that we need to see. The first is an improvement in the health crisis, and measures being taken by central banks starting to take effect. This will result in businesses being able to weather the storm both now and after the plethora of measures designed to help have come into force.
The improvement in the health crisis is, of course, the hardest to predict and, at the time of writing, both the Prime Minister and the Health Secretary have tested positive for COVID-193. It is possible to model the potential numbers based on what we have seen in China, Italy and Spain but with inconsistent tests, different methods used in verifying numbers as well as how quickly the benefits of social distancing will start showing, it is too early and too risky to make decisions based on this.
The second part is how effective the central banks’ response will be. Both the US Federal Reserve and the Bank of England have taken various measures; they have, for the first time, effectively cut interest rates to zero, promised unlimited quantitative easing (a policy used by central banks to quickly increase the domestic money supply and spur economic activity) and joined other central banks across the world to unblock the global financial system4.
These approaches have happened much faster than in 2008 and in far greater magnitude. For example, the fiscal measures (government spending) being seen in the US, with the $2 trillion Federal government stimulus package which includes direct handouts to citizens. Much the same has been put in the place in the UK with the government paying people directly. This is being funded through the Treasury and Bank of England and falls outside state pension and unemployment benefit that is usually covered by taxes.
Finally, the third piece to the jigsaw presents its own set of intricacies. Of course, travel, leisure, hospitality and general retail are the first and hardest hit by COVID-19, however social distancing and lockdowns could lead to other industries taking a hit in the short term too. Extensions to businesses filing their annual reports have been put in place and others are already warning that revenues and profits will likely to be hampered. These are all difficult to quantify at present and again require more clarity in data to get a broader and better picture. It is important to note that we use active fund managers who have large teams of analysts and economists to manage your exposure to these companies directly, and we are in constant communication with them.
As always we are here if you need us, and we want you to know that despite things appearing bleak at times, positives will come from this. This will not just include the markets, but socially in how we interact and look after the most vulnerable, as well as environmentally, as we realise that the reduction in air travel and traffic on the roads we have seen has led to an incredible increase in air quality. It is those businesses that have good governance and ethics that will likely be the ones that are remembered for the correct purposes once this has all blown over.
We will continue to keep you updated and continue to monitor all that we can. Please do reach out if you want to talk to us.
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