Friday, 1st May 2020.
Over the last week there is much greater clarity on a range of issues. One is how we are likely to behave as the lock-down is eased, and the other is the preparedness of UK plc for what lies ahead. In turn these inform us on how best to invest cash currently on the side-lines.
One word came up in a conversation this week which struck a chord – “reassuring”. Of course, there are always some who put a positive spin on the ugliest events – so I contacted someone else, who I knew was typically measured. Very similar sentiment again.
These two people are analysts who talk to the CEOs of smaller businesses quoted on the UK stock market. They do this day in and day out. They are continually taking the pulse of the health of UK plc. They come at this analysis from different angles, but what was striking in my two conversations this week was how similar was the sentiment.
This is what they were telling me…
Ringing the same bosses 3-4 weeks ago there was considerable fear around whether their businesses would survive. In contrast, in the last week they seemed more sure-footed. The CEOs had focussed on their “financials”, taken action where necessary, and it was common to hear something like “we have cash to cope for 24 months”.
In particular, Government action enabling companies to furlough staff gave these companies invaluable breathing space and thinking time – which appears to have been well used. The CEOs recognise that the current situation is severe but temporary.
Increased confidence is also reflected in an increase in directors buying shares of their own companies. They are confident they will get through this.
Of course there are also exceptions. Many companies have gone forever, particularly on the High Street and in the leisure industry. A significant number who are furloughed will subsequently be made redundant. Other companies are limping along with government support, but will not survive long once that is withdrawn.
“Severe but temporary” is a common refrain. But neither “severe” nor “temporary” are easily measurable. McKinsey & Co had a good stab at this in their report which I referred to in “The Case For The Cautious Optimist” and in “Shining A Light”. And there are grounds for saying that their optimistic scenario is unfolding.
Yet they would also be the first to admit that the scope for error, for a more pessimistic scenario, is considerable. For example, there is broad acceptance that there will be more infections when the lockdown is eased, just as has occurred in Germany. But will it be sporadic, and contained with the help of “test and track”? Or, more worryingly, will there be a widespread second wave next Autumn/Winter, like 1918, causing another lockdown and the NHS being overwhelmed yet again?
No one knows with a useful degree of certainty.
If we optimistically assume a vaccine, or even some drug which sharply reduces the severity of the virus, that would be fantastic. But two problems remain even in this situation. Consumer behaviour, and the pre-virus vulnerability of markets.
My preferred analogy is that people, consumers, feel like they have been mugged – this was the impact of the severity of the virus and the speed of its spreading. I said before that this means they will not be coming out any time soon – and to the extent which they do, they will behave cautiously. That this is the case is now coming out in the behaviour of consumers in China, Germany, Sweden, and Denmark – and it is confirmed in surveys in the UK in recent days.
Bottom line? Confidence will not return overnight, so the economy will not recover overnight.
Confidence will return to different sectors at different times. I might be confident enough to return to my office or factory job. But not confident enough to go to a restaurant or book a holiday, which in turn means I won’t spend so much on clothes.
Some industries think sales or bookings might be back to pre-virus levels in 12 months – but more typically they talk of 24 months. One firm which serves restaurants all over the UK believes they might recovery 60-80% of turnover within 24 months – but it will not be easy when 30% of their market-place has disappeared overnight, and permanently, and the rest are looking to cut costs.
Turning to the vulnerability of markets which we frequently discussed through 2018 and 2019, this has either not changed or has got notably worse. In particular, many companies are taking on even more debt just to survive, not to invest in new equipment or research or better qualified staff. Government debt globally has rocketed within two months – it was already far too high. The debt problem, and how to solve it, will be a battleground, and source of shocks and volatility, for years to come.
To swing back to the positives, last December and January I highlighted the considerable potential in the UK taking a decade view – of course that potential won’t magically appear in 10 years, but over those 10 years – I say decade-view to be clear that little will happen overnight, and patience is needed.
Now, one of the most compelling and positive outcomes of the virus is that what was cheap in January is in many cases 30% cheaper. To quote one of the analysts I referred to earlier, “what was cheap has now never been cheaper”.
Now to the “how”. Last week I set out “10 Funds For The Bounce”, and your adviser will consider these and other funds to give you a selection suitable for you e.g. those funds were largely what we call medium risk, but many of you will also want more cautious fund choices, and your adviser has these in his or her armoury too. But how to invest into them?
We have to somehow balance considerable ongoing uncertainty with the great value in our preferred funds. We need an approach which is measured, but also flexible.
Firstly, we must consider if your existing funds are the best they can be, for you, in the current environment. In this respect your adviser will use those 10 funds as a benchmark, as well as other funds for more cautious investors and income investors.
For example, you might have some funds for growth which have held up quite well in the last 6-12 months, but where there is now much greater upside by switching to alternatives.
Secondly, how to re-invest cash, and how much of that cash.
Our house view is that most clients should, where possible, leave 25% uninvested for now.
For example, if you are currently 50% invested, and 50% cash, we would be looking to re-invest 25%, that is half of the current cash.
That 25% to be reinvested should be invested gradually, by dripping month by month.
If you are already 50% invested, investing the other 25% over 24 months, month by month, is not too extreme an approach in all of the circumstances which prevail.
This is a flexible approach. If the markets have another lurch downwards (our working assumption amongst a range of possibilities) you can accelerate your investing, to buy at even cheaper prices. This is what I had in mind in “Our poor old brains” – the best opportunities will arise when our base instinct is that we should run a mile!
The above embraces our cautiously optimistic approach. It is one central example which you can use to discuss options with your adviser which will suit you. I hope you find it helpful.