Market perspectives: 03.04.2020
As the coronavirus crisis stretches into its fifth month, the uncertainty surrounding the impact of the pandemic on public health, the global economy and the value of financial assets remains elevated. The incredible swings in financial markets are unlike anything we have seen before, exacerbated perhaps by the popularity of passively-managed tracker funds and algorithmic trading but also by the absence of few, if any, historical precedents to guide market participants through this crisis.
Within the space of six weeks, the MSCI All Country World Index has fallen by 33% and then rallied by more than 10%. Meanwhile, in fixed income, signs of stress in the corporate bond market have been eased to some extent and the last week been a record for bond issuance, as central banks have stepped in to buy corporate debt. Such has been the level of support provided to the bond market that we have even seen Carnival, the world’s largest cruise operator, look to tap demand from bond investors in recent days, something that would have been unthinkable just a few weeks ago.
And there is good reason for the improvement in sentiment. As referenced above, support for the financial system, be it from central banks or from governments, has come in unparalleled size and with unparalleled speed. Reports from China of the beginnings of a normalisation in economic activity provide encouragement for the rest of the world that the virus can be brought under control, as do signs of a slowdown in new cases in countries like Spain and Italy.
However, considerable uncertainty remains. While the depth of the downturn is highly likely to be significant, its duration, which is arguably more important to understand, is harder to predict, not least because the inadequate level of testing in most countries makes it difficult to know the true number of cases around the world. The number of confirmed cases passed 1,000,000 on Thursday, however, some have suggested that the true figure could be an order of magnitude higher. Indeed, a study released this week by some of the UK government’s scientific advisors at Imperial College estimates that between 1.2% and 5.4% of the UK population may have been infected by the virus by 28 March, that is a figure as high as 3.5 million versus an official number of approximately 34,000 confirmed cases.
The shape of the recovery is also unclear and will be heavily influenced by the success of government efforts to prevent the large-scale collapse of businesses, particularly those of small and medium size. The ability of companies to resume normal trading and bring back staff that have been furloughed will prove crucial in supporting consumer confidence and the speed at which the economy is able to recover.
The make-up of the economy may also be different from before the crisis. We wrote last week on changing short-term consumer preferences, but there will be long-term implications. Some expect a more cautious consumer, even once a full economic recovery has taken place, however, if post-war periods are anything to go by, then this has historically not been the case, with the 1920s and the 1950s both periods of strong consumer spending.
Business practices are also likely to change, something that we addressed in our latest thematic note, with topics including the location of supply chains, the ability to conduct business remotely, and the ability to sell products online, all under the spotlight in the current environment.
It is often said that if there is one thing that the market doesn’t like it is uncertainty. However, we are of the opinion that uncertainty is not necessarily something that an investor should be afraid of, but more something that they should be aware of. Warren Buffet said that “risk comes from not knowing what you are doing”, and in times such as these it is important to be acutely aware of what it is that you don’t know, and focusing on what you do, or at least those outcomes in which you have a higher degree of confidence.
There will be an economic downturn from the coronavirus crisis, that we can already see and indeed financial markets have reacted to that, but there will also be a recovery. And the companies that prosper the longer-term are those that first have the financial strength in order to survive the crisis, second, offer products and services for which there will be enduring demand, third, have a strong competitive position in the provision of these products and services, and fourth, successfully position themselves to benefit from structural growth trends.
Estimating whether a company meets the four requirements outlined above, is, in our opinion, easier and arguably more important than estimating the exact outcome of the current crisis and therefore we continue to focus our attention on those areas, while acknowledging that there are things that we cannot possibly know, or accurately predict.
Should you have any questions about anything raised in this article, please don’t hesitate to contact us via email, or on 0207 337 0777.
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This note has been produced by Killik & Co on the basis of publicly available information, and all sources are believed to be reliable, but we have not independently verified such information and we do not give any warranty as to its accuracy. Some of the stocks mentioned in this note are covered by Killik & Co’s Equity Research team and others are not. The mentioning of the stocks does not represent a recommendation to buy or sell any securities, and the note is intended as a marketing communication rather than research. This note does not purport to be a complete description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. Nothing in this note should be construed as investment advice or as comment on the suitability of any investment or investment service. Prospective investors should take advice from a professional adviser before making any investment decisions. There are risks with almost every investment that you may not get back the original capital invested. The value of your investments may fall as well as rise and the past performance of investments is not a guide to future performance.