Firstly, I hope you are all safe and well and coping with the challenges presented by the huge change to our normal daily lives we are all experiencing at present.
It has been three weeks since the Government introduced “lockdown” designed to slow and ultimately defeat the spread of the Coronavirus. The measures introduced are without doubt the most stringent ever applied to British Citizens and echo similar constraints imposed across the world.
The knock-on effect to business and markets has been significant, however, since our last briefing the markets have staged somewhat of a minor recovery and operated within a more normal volatility level for the last 10 to 14 days.
If we use the FTSE-100 as a proxy for markets, we can see the last three months have been terrible for equity investors. The FTSE 100 bottomed at 4993 on 23rd March 2020.
Source: London Stock Exchange
As you know our message was to remain invested and not to rush to sell. This proved to be sound advice as the FTSE 100 (and global stock markets) responded positively to the significant promises by governments to provide record stimulus packages to economies to help stave off the worst effects of the global pandemic.
Markets around the world returned some of the biggest daily gains ever during the week of the 23rd March, recovering some, but by no means all, of the losses incurred in February.
In fact, if you look at the chart from 23rd March to date, the recovery looks impressive with a gain of 17% in a little over two weeks.
Source: London Stock Exchange
I am however reminded of the phrase “lies, dam lies and statistics” and while the mini recovery has been welcomed it merely disguises the current Year to Date losses for many customers.
As I mentioned in my previous briefing almost all our clients do not have 100% equity market risk or exposure, so the falls in your portfolios were not as marked. We maintain a range of investment solutions with a broad spread of assets, to provide a degree of protection against the very market shocks we have seen, matched closely to customers own risk profiles and expectations of returns.
We now appear to have entered a period of relative stalemate as markets and investors digest the daily news flows and as things seem to be progressing as expected (or maybe even slightly better as a result of the draconian measures introduced) with all awaiting the beginning of the relaxation of the measures, to see what shape businesses both domestically and globally are in post virus.
It would be easy to think that the world economy is doomed in the current circumstances, but as with all unplanned events there are winners and losers. Undoubtedly the supermarkets and food producers have benefited from the unprecedented demand.
One client involved in one of the biggest food manufacturers and distributers in the world likened the first week of lockdown to “supporting Christmas but without a plan” as an additional £1.5bn of food and goods were purchased from British supermarkets in a week. While we saw some shortages, the food chain worked extremely well. Demand has continued to be strong as people have no choice but to eat at home.
Amazon continues to receive record orders and is expanding its workforce to cope. Bear in mind that means suppliers are selling goods and delivery companies are as busy as ever, with the Christmas analogy being used again by one parcel delivery company.
So not everywhere is struggling, however, hospitality (restaurants, pubs, café’s and hotels), travel (airlines, cruise companies, cottages, trains and resorts), sports (professional sports, stadiums and local teams) and vast swathes of manufacturing are all suffering.
Investors face the impact of cancellation of dividends by UK banks and most of the big UK insurers. Bank of England intervention led to the prudent decision to retain dividends and review the situation later. The bank dividends alone amounted to £15.6bn of cash that had expected to be paid to shareholders being retained in the Banks balance sheets – for now. The negative market impact of this was not significant and was short-lived.
The Government in response to the virus launched an unprecedented package of support for business and jobs. There have been and remain some issues with getting the help to the right people in the right time, but if it delivers on what the Chancellor intends, then it should slow the rise in unemployment and give the economy a significantly better chance of moving forwards.
Once daily life can function again, future attention will turn to how we deal with the significant levels of additional debt the special measures will create. The strength and pace of recovery and debt reduction will be crucial for the future of global equity markets.
While many of our portfolios contain a significant stake in UK listed shares, much of this depends on global activity, with over 70% of the FTSE 100s income being derived from overseas activities. Investment performance will not therefore just depend on the UK recovery from the epidemic but to the worldwide response. While forecasters see UK and European markets slowing in the short term, there is an expectation that India and China will continue to grow.
It is not a case of if we come out of these measures but a matter of when. That will have a significant effect on investor returns. If we are able to start to lift restrictions around the end of May into June, as currently predicted, then I would say that is priced in, however, any significant delay to the ability to start to return to normal will have a significant further effect on Government finances and the time it takes for the economy to recover. Our Sothern European neighbours are ahead of us in their experience of the pandemic and with some relaxation of lockdown in Italy and Spain imminent, European equity markets are starting to recover.
I expect the route to repair the debt problem will this time focus on corporation tax rather than public servants. It would seem logical that shareholders should shoulder the burden of debt for the benefit of the Government schemes that will undoubtedly save a great many of them from going bust. Given that this is a global issue with stimulus packages from all major governments then increasing Corporation Tax would not appear to affect the UK’s competitiveness in a global market assuming many of the governments look to recoup the “investment” in this way.
So the next big market movement will depend on the next phase of the pandemic. In simple terms if the lockdown continues for significantly longer than current estimates that will be negative, if it is around the timing that is expected then that will be positive.
However, this has been and remains a fast-moving situation and one we are monitoring as closely as possibly for you.
We continue to be open for business with all c200 staff currently working on a secure network from home, something we achieved by Friday 20th March.
Advisers are well briefed on the current situation and very happy to discuss how you and your family are impacted by the current difficulties and to offer solutions. We are in a new tax year and for medium to long term investors and savers, there are opportunities for further investment. The short-term uncertainty can be managed in a number of ways, so that the longer-term prospects may be captured for those with the capacity to take some risk, once short term needs have been met.
Please stay safe and I and the team will continue to update you as we go through these tough times.
Chair Investment Committee.
14th April 2020
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