I am two Darren’s these days!
On the one hand, I am as worried as everyone else about when this virus will be stopped, the impact upon my business, employees, family, friends and lifestyle. Clearly things appear to be about to get a whole lot worse here in the UK and over in the US. The media lambast me daily with the grisly details.
On the other hand, I have the great privilege of working for my clients in trying to understand markets and how these impact upon their portfolios. I have to research the data and consider the facts which takes away some of the emotional response that we are exposed to in our everyday lives.
I find myself daily shaking my head at the apocalyptic news reporting, so I thought that I would use todays article to dispel some media hype – and beware – I’m not holding back!
Media Myth 1 – ‘There’s no end in sight’
This virus is truly terrible. A trip to the supermarket or bank these days is fraught with tension and it seems as if life will never return to normal.
However, let’s consider some data which clearly supports the fact that there is an end in sight:
In China, around 80% of workers are now back in work and no new cases are being reported of the virus domestically.
In Germany, the amount of new cases reported, levelled off this week.
In Italy, the amount of deaths reduced for the first time on Tuesday. This poor country has really been hit, and they still have issues to contend with in the south of the country, but the headline data matters.
In Spain, the amount of deaths reduced for the first time on Thursday – although new cases still continue to rise.
As the virus has spread, other countries have been able to learn from one another’s responses. We are now seeing how the success of social distancing and greater testing is being utilised in countries at far earlier stages in the virus spread.
The one caution for me is just to see if the cases re-emerge in places such as China and South Korea. We all pray this does not happen, or that it is jumped on very swiftly.
Media Myth 2 – ‘Markets are in freefall’
Wrong! The Federal Reserve (US Central Bank) have taken massive measures to assist the U.S. economy through rate cuts and bond purchases and on Thursday a $2 Trillion rescue package was agreed to thrust vast levels of liquidity into the US economic system.
On Tuesday, the Dow Jones (US Stock Market) enjoyed it’s best one-day rise in over 80 years.
We have seen the FTSE 100 climb around 6% this week at the time of writing (early Friday morning), which is a very pleasing set of data. It indicates that there is a tentative support level around 5,000 points on the index, and the market now appears to be waiting to see what comes next.
My humble Darren caution to this would be that things could trolley on down before they rise firmly, as we need to see how the worlds’ biggest economy (the US) copes.
We are still carrying out our client annual reviews and our findings are that their portfolios (around the level 2-3 mark from 1-5) have fallen by roughly half the FTSE 100 over the year. Obviously this varies by the day, but we can very comfortably state that none of our client portfolios have fallen as far as the FTSE 100 over the year at the time of writing. We are very proud of this as we know how stemming losses will help prepare us for recovery.
Media Myth Three – ‘The Economy will take generations to recover’
Wrong again!
There are many doomsters out there predicting the end of civilisation and free markets. These people loved to tell us that markets would take ‘decades’ to recover back in 2008 which was incorrect. They also loved to tell us that a ‘leaving’ UK would go off an economic cliff straight into hard recession in 2016 – this was also incorrect.
The problem with so many of these ‘experts’ is that they never allow for human ingenuity and courage to overcome the challenges in front of us.
I have spoken with many fund houses over the past week and the feeling from them has been unanimously optimistic. Yes, we all freely accept that this may not be the bottom of the market. Things may well get worse before they get better.
However, the fund houses are telling me that many directors of the companies they invest in are personally buying their own companies shares whilst they are cheap. This is hugely encouraging as it suggests real confidence on a company by company basis.
They are also telling me that the UK post-election boom (anyone remember the election?!) created massive levels of cash flowing into UK Equity funds. This cash was not all deployed as the virus started to hit markets and is now being used tactically to buy shares at good value prices.
I had a fascinating conversation with a leading Bond house on Monday. They reminded me that any good bond fund manager will assess the underlying strength of every company they hold in their fund regularly. They will have stress tested each bond issue to see if the company can pay the interest owed – even in the event of a calamity such as a warehouse fire or office flood. Yes the virus is ‘a calamity all at once’ but the mechanisms still hold. This is why we are seeing so few bond defaults even in such an illiquid market at this time.
Personally, I can see millions of people currently sat at home waiting this thing out. They are not going anywhere and they can’t buy any more toilet roll!
When (not if) this thing is over, I predict a wall of money that will come at the economy as people decide to change that car, house or even husband!
If I was the Prime Minister right now, I would be starting to think about the message to ‘get Britain spending’ once we are in the clear – because that economic bounce is one I very much look forward to.
Summary:
To conclude today, I want to deal with myth three some more. I believe that we now face two outcomes for markets and ultimately portfolios. These are a V or a U shaped recovery.
The V Shape:
In our V shaped recovery scenario, the governments of the UK, EU and US manage to beat the virus and declare an ‘all clear’ sometime around June of this year. In this instance, I would expect a surge in markets and the economy as a whole.
Pent up demand for goods and services will flood the market and central banks may be scratching their heads about the rampant inflation problems they face! Ultimately this V shaped ‘snap back’ to take the FTSE back over the 7000 point mark is what I am hoping for but I just can’t tell currently.
The U Shape:
In our U shaped recovery scenario, we end up with ‘virus dodging’ as the new normal, with governments imposing lock downs and then opening things back up in a limited capacity before closing them again until a vaccine is found or the virus ends.
This would mean a longer period of muted economic performance and more damage to the global economy – but again recovery will come – just further down the track.
In this scenario, we would look hard at the case for US and Emerging Market Equities over EU and Japan – because of their ability to stimulate their own markets through more aggressive intervention.
Either way, the two Darren’s continue to argue in my head as my heart goes out to all those affected by this horrendous virus but my head sees future market opportunity.
Ultimately though, I am certain that we will come through this, and I am more upbeat about markets now than I was a few weeks ago. The news will change daily, but one thing remains true, the case for long term investing looks logical and inspiring right now.
Anything you need, just call either one of me! Stay safe at this difficult time and God bless.
Darren
