The UK Office for National Statistics (ONS) published its first rapid response survey to the Covid-19 outbreak this week. It showed that around three quarters of UK households can manage for up to three months on 25% less income.
They also found that 27% of UK businesses had decided to lay off staff ‘in the short term’.
This really focuses minds.
The UK government is now in a race against time to get us out of this lockdown before disastrous levels of economic damage occur. We often hear about the letters GDP (Gross Domestic Product). This is basically a countries gain in productivity. You need growth very often just to stand still. The UK’s GDP has averaged just under 2.5% per year over the past 60 years.
To offer some perspective, we are hearing fund houses now suggesting a -10% drop in GDP for this quarter. The worst quarter in my 22-year career span was the first quarter in 2009 when the great financial crisis cost the UK around -5.9%. If projections are correct, the UK is going to have a lousy 2020, but this is all about productivity time lost. We know what has happened, it’s all about what we do next.
It is fair to say that the world was not prepared for this. Many countries now rely upon the goodwill and trade of a globalized economy, so they no longer produce things like protective equipment, testing kits and ventilators on enough scale to cope individually.
In the UK, this point is painfully illustrated as we observe how a country like Germany (that still has scalable manufacturing ability) has been able to far more efficiently tackle the health crisis through creating the right kit.
The way I see it, we have two things on our side. They are (and you are going to laugh or scream at me here):
Brexit and a recent General Election!
Britain’s planned exit from the European Union actually caused the country to stockpile considerable levels of food and medical supplies. This happened at a government planned level but also at household level. I believe this is why our supermarkets are still managing to cope with increased demand and no one is really going without staple goods.
The comprehensive December victory for Boris Johnson broke the parliamentary uncertainty that had shrouded the UK in gloom and prevented investment. My contacts in the fund management world were telling me of huge inflows of new investment into their UK Equity funds in December, January and February. This put many UK fund managers at an advantage when the crash broke – as they could still deploy this cash into much cheaper stocks as the market fell.
The UK government have put lockdown measures in place that are now showing early signs of working – just as I predicted! Spain and Italy are both now reporting less cases and even the United States are reporting less hospital admissions whilst still reporting rising death rates. This has offered data to the markets and brought about early recovery signs – as I also predicted!
Phase one of the lockdown is working. We are hearing Phase one described as ending once the UK government are certain that the hospitals are not stretched beyond capacity. They also need to know that they can test on a massive scale to gain greater intelligence about the historical spread and behaviour of this virus. In addition, they will need a system that enables them to spot resurgent cases and swiftly be able to lock down those households affected.
Once the government has all these things, they can move to Phase two in letting businesses reopen and children return to school with social distancing still being a way of life and large gatherings prohibited. The important effect of this will be to rescue our economy from a cliff edge. In my humble estimation, I think the government has about eight weeks from here to get phase two established before households and businesses collectively go under on a huge scale.
Last week I showed you how we had endured the swiftest entry into a bear market of all time. Indeed, the market crash was the sharpest in over 100 years. However, the initial rebound was incredible and tested the Fibonacci horizontal recovery lines – pointing to a strong recovery.
Markets have risen well this week. Some of our clients will be receiving their quarterly statements soon from Old Mutual and the other platforms. These will take into account the huge drop of around 30% from the heady heights of January to the end of March. My encouragement would be to notice that the FTSE 100 is up around 7% from the end of March as we speak. Things are moving in the right direction – and fast.
You will all know me for my positive outlook and my core views have not changed.
I believe that markets will recover back to their January levels in time and that the recoveries will be sharp and almost irrational when they happen. I also am confident that our client portfolios will benefit from the massive levels of stimulus (Quantitative Easing) that central banks around the world have pumped into the bond markets.
In the past six weeks, I am informed that central banks have pumped the same amount of stimulus into the markets as they did over the entirety of the 24 month financial crisis! This shows serious intent.
This monetary ‘easing’ should likely push up our clients’ asset prices in the coming years. One of the points we consider for investors, is the ‘risk free rate’ on US Treasuries which spun out of control last month. This now appears to be under control and has returned to zero at the time of writing. This suggests considerable growth potential from here.
So I am very positive.
I am slightly concerned that markets may be over encouraged at the initial slowdown globally in CV-19 cases. Just as they overreacted to the initial outbreak, I am worried that they are banking on countries going into Phase Two sooner than may be realistic. Every day that governments fail to build the testing and infrastructure for phase two – brings economic damage far closer. It would be prudent to brace yourself for a slight market fall back in the coming week.
Then there is the social cost of delay. I have considerable thoughts and fears about losses to human liberty, the pain caused to the most vulnerable in society and a potentially irreversible dependence upon a civil ‘wage’. However, those thoughts are for another day!
I can only state that I feel the damage to our society will rack up the longer that this lockdown has to continue – all be it for all the right reasons.
I mentioned a couple of weeks ago that the ‘doom and gloom experts’ always forget human ingenuity and determination to succeed under trials. I heard this week in a webinar conference that the progress made to date on a vaccine to the CV-19 virus is remarkable. They have managed to accomplish testing that would usually take 5-8 years in a period of just 40 days! If that doesn’t show human ingenuity, I don’t know what does.
The race is truly on for governments around the world to get people back to productive work and education – and soon. This is true from both an investment and society perspective and I believe that this can be done.