It has been another incredible week in investment markets. Perhaps the most violent (from a volatility perspective) in history. All assets have moved in extreme ways… even government bonds, that are supposedly “risk-free”, lost considerable value. Interest rates have been cut to all-time lows, and Government spending has exceeded anything we have previously seen. Wow! Take a pause to breathe. Perspective is required!
We are all set for a recession. However, this time will not follow the typical pattern, caused by financial imbalances or a market bubble. This time is different. We are about to enter a policy led recession, or a kind of stay at home recession if you will. Governments globally are trying to protect their citizens, understandably trying to defeat this enemy by limiting its spread and asking their populations to alter their lifestyles and reduce contact with others where possible. This week the world has realised that there is going to be a major hole in economic growth on a global scale, and therefore the drive for liquidity (to get the world through this tough time) has caused wild moves in asset prices, and unprecedented policy support to help shore things up.
Unlike many recessions, this time we have a lot more information. It is not hidden in the financial sector… we can all see it as it affects us on a daily basis. Through our own decisions it is clear that discretionary spending will be hit the most severely. Travel, leisure and retail are the industries facing the greatest challenges. This is not a slow realisation that we are entering a recession, it is abrupt. Peoples spending habits have already changed drastically, just this week.
Recessions are usually “V” shaped. They happen gradually and then recover slowly. In this case however, it is likely to look more like a “U”. The decline is quick and vertical. Government action has been prompt and coordinated, and as changes in behaviour and warmer weather start to take effect, the virus should reduce to a point where normal behaviour can be reintroduced. It will be slow to start, though people will likely return to work quickly, with the corresponding rebound in activity as rapid as the fall. In recent weeks we have started to see this already in China, and it will shortly follow in Italy along with the rest of continental Europe.
That isn’t to say that in the post-recession everything will be back to the way it was. There will almost certainly be some permanent damage to the economy, along with changes to behaviour that will stay with us for a long time. Whilst some spending such as moving to a new house or buying a car, might be deferred, much will be lost (holidays, cinema trips, restaurant visits). These discretionary sectors are therefore most at risk, and there will be some casualties. Social change will also be widespread. An acceleration in video conferencing might reduce our carbon footprint, and improved personal hygiene and an appreciation for more effective planning are just basic examples.
The picture we have of the upcoming recession is therefore quite clear. There are some gaps to fill in, such as how many businesses really can survive this, and how the re-introductory phase will work. It is unusual though, to know such a lot about what is about to come, and how we will come out of the other side. This stands us in good stead.
Coming on to markets, this means that at some point they will start to re-appreciate the forward outlook, rather than living in the now. No one knows when this will be, but it will happen. In the meantime, we have seen volatility in our portfolios, but nothing like in the wider markets. We know that we have a preference for quality assets, with big balance sheets, that will come out the other side. In addition, we carry a good slice of liquidity (note last week’s blog). This means we won’t need to sell assets that have lost significant value if clients need cash or income, and it means we have good cash levels to purchase more quality investments as their price sells off. We have been adding to positions this week. So, whilst performance numbers are down in the short term, we feel over the coming weeks and months there is an excellent forward opportunity.
A stay at home recession is certainly on the way, but it may be short-lived, and a go out recovery may not be as far around the corner as we think. As ever we are watching every move.