I hate to start with a non-investment matter but it is impossible to avoid the coronavirus issue.
If you and yours are thinking about having a beer in the pub this weekend, or going to a busy restaurant, or even having a family gathering, please do think again. Have a thought for the NHS staff who are working shifts of 14 hours to stand between you and the bullets, and putting their lives at risk to save the lives of people like you, and your family and friends.
I do not exaggerate with the latter. We have two family members of our office team working in ITU units in South East London, which appears to be a growing epicentre for the virus. They and their colleagues are overwhelmed and exhausted and hugely under-resourced. Please have a thought for them as you plan your weekend.
In the last fortnight there has been important and growing support from the Government in the economic sphere. There were some obvious gaps but it is always easy to carp.
From the point of view of all of our clients (advised and non-advised), and our businesses, I am particularly pleased that marked action is being taken to support the banking sector. It is absolutely vital that confidence is maintained. In Autumn 2008, we were within a couple of hours of cash machines being closed in the UK. This will not happen in 2020 – the banks are safe and the banking infrastructure is regarded as a priority.
Yet there are many more economic angles which need managing by the government and the authorities. How do the Government support individuals who have been made redundant this past week? Should they support all businesses, even those which have been barely sustainable for years? It is not easy to get these decisions right – a bit like building a plane while it is in flight.
Well-informed global consultancy McKinsey & Co have produced a briefing note on two scenarios for the development of the virus in the months ahead, and the implications. It is the implications which concern us, as they give us a sense of the journey just ahead in financial terms. Below is a precis to help shine a light into the months ahead.
Note that McKinsey accept these are only two middling views, and some “respected institutions”, as they put it, are expecting much higher virus infections. They intend to keep updating these scenarios, and we will look out for those.
The first scenario hints to me that we might start seeing signs of key stock markets bottoming by mid-April, but not sooner. We have a number of indicators we have used for decades to identify buying opportunities – these are big focus in coming weeks. We are also building a shopping-list of outstanding funds at beaten-up prices – the opportunities will be extremely attractive.
Over to McKinsey:
Scenario 1. Rising optimism by mid-May.
New infections peak in mid-April in US/Europe. Testing catches up with need. Virus proves seasonal.
By mid-May public sentiment is considerably more optimistic about the outlook.
Consumers stay at home, unemployment rises sharply, and bankruptcies soar.
Although the virus is under control by June, a recession continues until September. Only in the last quarter of the year does a genuine economic recovery begin to take hold.
The Autumn sees a resurgence of infections, but everyone is better prepared and the economy remains stable, albeit at a low level.
Scenario 2. Peak delayed, prolonged downturn
New infections do not peak in US/Europe until May, due to delayed testing and inadequate response to social distancing. The virus is not seasonal. China forced to keep in place some quarantining.
Consumers keep cutting spending all year, and unemployment and bankruptcies are notably worse than in scenario 1.
The economic impact is similar to 2008/9. Recovery only begins from April 2021.
Most importantly, in both scenarios a full-blown banking crisis such as occurred in 2008/9 is avoided. The banks are stronger and the authorities learnt vital lessons in 2008/9.
This means that you can be content to sit on cash until it is clear that investment opportunities are at hand. That will be a significant opportunity – we just need to be patient.
Do get in touch with any questions, we are still here to talk with you.