The two most powerful warriors are patience and time
The clue is in the title!
COVID-19 is a global pandemic which has led to something we have never seen before: a global health crisis which in turn has prompted a global economic crisis.
The virus has no respect for geographical borders, race, religion, politics or economic affiliations, either regional or global. Unfortunately, some people do not understand this yet – but they will before it is all over.
Looking at the great financial crisis of 2008, the world did not cooperate immediately to stem the decline, but it did get there eventually. There can be no solution to the current crisis until we see much greater cooperation on a global scale. Whilst it is tempting now, when we are all in a fragile psychological state, to engage in finger-pointing and a blame game, this will solve absolutely nothing and probably only make things worse. Once the current crisis is over, we can all indulge in this to our heart`s content.
As individuals in the rather unusual circumstances we are facing, we must be extremely wary of politicians who will use the current situation to sow discord in order to divert attention away from their failed policies.
While we have given up some significant democratic liberties in the short term in order to suppress the virus, we must ensure that our politicians give us back these liberties in a swift and timely manner. Make no mistake, we are in a very dangerous period for democracy.
Let’s hope there is some improvement in global political leadership and that world leaders put aside their petty squabbles and focus on the issues that affect all of humanity now. The world needs economic growth to rebound quickly and reassurance from leaders and central banks that they will do what it takes in a coordinated way.
More questions than answers
As an industry, asset management has an appalling track record on calling things right. Much of the fault lies with the financial media and their global, 24/7, 365 days a year media cycle. Whilst many impressive financial experts (who have called something right once upon a time) are wheeled out to give intelligent-sounding advice, in reality no one has a clue how this will play out – not even the medical community. Your individual opinion has just as much probability of being right or wrong.
So instead of focusing on “what ifs?” and “maybes”, let’s try and concentrate on what we know.
The economic data is bad – really bad – and it is only going to get worse in the short term. In fact, some of the readings will probably surpass the 1930s in their nastiness. However, we all know this, as do the markets. Of course, this is just a point in time, albeit an uncomfortable and scary one.
One important point to consider is that even though financial markets are dependent upon economics to some extent, they do not follow every twist and turn in real time and can become somewhat detached over certain periods of time. Economic data is backwards-looking, while markets are more about predicting what is going to happen. To put it in simple terms: many people are trying to drive while looking through the rear-view mirror.
At some point in time there will be an economic recovery. Nobody knows when, but it will happen and perhaps even sooner than many anticipate. While people are talking about a V shape or a U or even a W, it really is all alphabet soup. We just don`t know until it happens, but if you’re not positioned for it you won’t participate because the movement is likely to be fast and aggressive in nature.
Human beings are pack and social animals – if we were not then prison and solitary confinement would not be punishments. After this severe crimping of our freedoms there will be some latent and pent-up demand.
Following the herd is not the way to generate long-term outperformance. What may seem sensible now may not be soon. After all, how many pieces of exercise equipment does one household need? How many monthly trial subscriptions to media streaming companies will be cancelled once lockdown ends?
Earnings from companies are and will continue to be awful for a while, but this lowers the bar going forward for future comparisons and early evidence suggests that companies are being prudent in their spending and dividend policies. There is also a significant chance that companies will come out of this leaner and meaner, with the subsequent rebound in profits proving to be stronger.
Analysts have thrown in the towel on even guessing what company earnings are going to be and companies have ditched any forward guidance, which does leave the hurdle for positive surprises rather low.
Be cautious when it comes to prominent, definitive announcements as there are many agendas out there. The airline industry has announced it will take years to recover even though it knows no more than you do. Could this sector just be looking for an excuse to streamline its businesses without taking political flak?
A large amount of expert professional work on treatments and vaccines for the virus is being undertaken in a global and coordinated manner. At any point in time there could be a breakthrough and it will be a binary event. The sooner it occurs the shorter the duration of the economic damage and the quicker and more pronounced the recovery.
The only expert on the virus is the virus itself. While convential thinking says we need a vaccine, there was no vaccine for SARS or MERS, which just vanished mysteriously after they had run their course.
Unemployment has risen and will continue to increase substantially. However, on a percentage basis the vast majority will remain employed. Those who have been laid off are mainly in the service sector and could be re-employed rather quickly as and when things get back to normal.
Those who are lucky enough to have steady, well-paid jobs will have rather a lot of accumulated savings given that there has not been much to spend money on. Once confidence returns that spending fire-power will be deployed.
Central banks have pumped unprecented amounts of stimulus into the system but can and will do more.[i] Governments have also joined in, though they need to do more. It is way cheaper in the longer term to fuel the recovery now via stimulus than to have a weak and prolonged recovery in the future.
Markets take great delight in wrong-footing the maximum number of participants. Looking at the AAII Sentiment Survey[ii] below, in which bullish sentiment on the part of individual investors is near 2008 lows, the maximum pain trade would be for markets to continue their upward trajectory.
Source: Bloomberg, American Association of Individual Investors, Sentiment Survey Bullish Readings; data represents what direction members feel the stock market will take in the next six months, 1 January 1986 to 30 April 2020.
We are starting to see some kind of return to normality on a sequential basis. Those countries that the virus hit first are the first ones out. Manufacturing in China is starting to rebound, though for this to continue there will need to be demand in other parts of the world.[iii]
Markets are discounting mechanisms that look three to six months ahead, while at the moment most investors are just focusing on the here and now or the very immediate future.
Businesses and human beings adapt in order to survive. We have already seen restaurants moving towards a takeout and delivery model. How long will it be before they move to a contained booth model?
Hairdressers and beauty salons have been rather quicker on the uptake. Two days ago I went for my first haircut in more than a month. Everyone wore masks and gloves, and everything was disinfected. At no point in time did I feel at risk and my only downside was not having an espresso, which was no big deal. I gave the hairdresser a tip of 50% because I know that the service industry has been hard-hit and now is the time to be generous if we want our local businesses to survive.
While there have been some very bold pronouncements on how things will change permanently, I am not so sure. But I do believe that many companies across the world will question how much office space they really need, which will impact commercial property and rent prices.
Peter Ahluwalia, Partner
Chief Investment Officer
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