Covid 19: Market Update

25th March 2020

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The first week of lockdown for the United Kingdom began with an extraordinary surge in stockmarkets.

For the US stockmarket the rise of more than 11% marked the best day since the final days of the Great Depression in 1933. This surge came largely because the US Congress agreed a package of some $2 trillion aimed at stimulating the US economy and protecting consumers from the worst ravages of the crisis. Similar measures are now in place across Europe and the UK.

We should therefore be encouraged that governments around the world have acted fast and dramatically to shore up and support economies. Here in the United Kingdom we have had one of the most co-ordinated responses. We have acted more quickly than the United States and with little political wrangling. More importantly the actions of the government have closely co-ordinated with the actions of the Bank of England. The support governments are providing is vast. Additional government spending in the Western world amounts to around an extra 5% of the total output of our economies – and interest rates have been set effectively at zero.

The goal of all of this action is not to prevent a recession. There will be a recession and it will be a sharp one. However, the action taken by governments – and the short-term nature of the virus – means it can be a relatively short one. In order to determine what the recovery from the virus looks like we have to understand whether the economy can go back to normal quickly – or whether we will have to live with a range of measures to keep the virus supressed for most of the next year. These measures, such as tracing people’s contacts digitally as they are doing in South Korea and testing for immunity, will enable our economy to become viable again. However, they would to some extent slow that economy.

We are continuing to run your portfolios on a very cautious footing. The primary reason for this is that whilst it is encouraging that the market is having some better days we continue to believe that for stockmarkets to mount a stable recover we require the virus itself to come under better control.

So, what are the key things to watch as we work out whether this has occurred?

Firstly, we would need to see a peak in the number of new infections occurring in the Eurozone. This enables us to understand how bad the peak is likely to be in those countries that are behind Europe – such as the UK and the United States. There is early evidence that Italy may have peaked however we have yet to see this in Spain and France. Here in the UK we are even further behind. Secondly, we need to understand whether the virus stays away in China as it re-opens its economy.

Should both these things occur in the coming days that will enable stockmarkets to understand the scale of the problem, put a price on that problem and then move forward. There is still scope for governments to make mistakes though. Not least in the US, President Donald Trump has set himself at odds with state governors in suggesting the US should be opened by Easter. A major error like this could lead to a dramatic spike in the virus and serious chaos in the United States. We have to hope that the apparatus around him persuades him that this is the wrong step, although it is worrying that in the immediate-term he seems to have set himself at odds with his own scientific and medical professionals. Navigating the recovery when it does occur will be crucial and your investment committee will work to ensure that you have broad exposure to the parts of the market that can do well as the world moves out of recession. Always in mind will be how to do this whilst carefully guarding the level of risk that you are able to tolerate in your portfolio. We must remember that whilst the past few weeks have been tough, they set the scene for one of the best investment opportunities of our lifetimes. Seeing that opportunity now, surrounded as we are by the horrible personal implications of the virus, is hard. However, it will come.

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