The last five weeks have been transformational for the world. We are all feeling the effects of the change, not least the rapid pace that it arrived. At first there was panic buying of toilet rolls, milk and bread. Investment markets fell indiscriminately as people sold assets to create cash, presumably to hide under the mattress. Since then, things have calmed down somewhat. People have gained a wider perspective around the issues facing them, and whilst there is still a clear and underlying sense of unease, there is also a recognition that we will get through this phase, as long as we plan effectively and are committed to the cause. Of course, there will be bumps in the road, this is all new. It’s how we respond to the challenge that will be important.
In the meantime, and perhaps unsurprisingly, investors have reflected the mood. After the initial harsh sell off, they have paused and thought things through. In doing so they have considered the data that is coming in everyday from every corner of the globe. They can see a trend emerging that suggests that steps towards ‘normalisation’ are not that far away, and most importantly for the economy, there is a belief that most European and US economies will start to reopen in stages throughout April and May. Markets have this as their central case. In theory if things play out as trends suggest, markets will continue to hold their position and move upwards from here. These then are tentative but positive steps forward.
The charts below illustrate the rationale behind the central case. These charts are just part of our database of daily research, this one being from Pantheon Economics:
Extrapolating the experience of other European nations to our own, we would expect that we will be in a very similar position in two weeks’ time, providing social distancing measures are adhered to. Aside from the very sad fact that the number of people falling fatal to the disease will remain high for a little while yet, at least looking further out we are likely to see significant progress, and therefore a lot of lives saved.
However, it would also be wrong to expect that the trends that emerge over the next few weeks gets us out of the woods. There are deep social and economic ramifications to this crisis that are likely to affect us for many years to come. In the immediate future, the monumental decisions governments face about how and when to restart the economy are crucial. Too cautious and the economic damage will be much harder to recover from, and too careless and the chance of a large second outbreak high. Each case would almost certainly encourage a market rethink, and a fall in value from here. We have cash in our portfolios ready to take advantage of any such volatility.
As readers of previous updates will have noted, we have been proactive throughout this process, reducing risk and adding cash to portfolios as investment values fell, and in recent weeks using some of that cash to take advantage of longer-term opportunities. Those decisions have already started to bear fruit in a short space of time, though there is a lot more to come.
A few things need to line up before we deploy all our cash on the side-lines. Testing needs to be quicker and much more widely available, allowing us to track and isolate more effectively. In addition, evidence about the percentage of the population who have already had the disease (linked to the so called “antibody test”) will allow policymakers to assess the level of “herd immunity”. This progress is slow at present, though these are today’s challenges that will determine the direction of travel in the coming months. Our Investment Committee analyse key data sources daily to try to get an edge, and as another week passes, we are happy with the progress we are making within our portfolios. We have planned for different forward scenarios, and whilst we know it won’t be plain sailing, we remain committed to the challenges ahead.
Have a great Easter everyone, enjoy the sunshine!