All About Those Lockdown Blues

17th April 2020

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As the UK braces for another three weeks of lockdown, stockmarkets are waiting for the end with as much impatience as the rest of us.

This past week most major markets including the US passed the point of making up 50% of the losses that they experienced in March as the Coronavirus crisis unfolded. So far those who have dismissed the improving markets as a ‘bear market rally’ have been confounded. Sceptics say that this is how bear market rallies work – they keep going until they have sucked everyone in.

The optimists argue that this one is a little different. This time the crisis will occur for an obviously fixed amount of time and markets are being supported by an enormous amount of stimulus from governments. It is a tug of war with one team arguing that the economic news is appallingly bad and the other arguing that it will pass.

Our view is that stockmarkets are currently pricing in an economic crisis that will last no longer than six months. For this to be true there is only one thing that matters – when we all can get out of lockdown and press the global reset button.

Resets are of course challenging things. It is some ten years since then Secretary of State Hillary Clinton presented the Russian foreign minister with a big red ‘reset’ button to symbolise a new start. Only to discover that a mis-translation had actually labelled the button ‘overcharged.’ This current economic environment is nothing if not overcharged – with fear, hope, debt, stimulus and emotion.

Nowhere is that emotion more evident than in the constantly undulating mind of President Donald Trump. He has spent the past week impatiently talking of the US re-opening at the end of April. The move met fierce resistance from calmer heads amongst the governors. Here in the UK the government is studiously avoiding any public statements, but a growing chorus of leaks suggests it believes that restrictions could be relaxed in the first week of May. This is the same point at which we are apparently to be greeted by the return of Boris Johnson to the stage. He may have risen on Easter Sunday (possibly out of sheer theatrical determination) but he is unfortunately only human in the time it takes him to recover from the virus.

It is our view that lockdowns will likely last somewhat longer than the market and politicians currently anticipate. This is because there is clear evidence that the virus is only really stopped by full lockdown. The social distancing measures that have led up to lockdowns have had very little impact at all. This means that before the lockdown can be meaningfully released the new cases must be far closer to zero than they are likely to be in three weeks’ time. Unless new cases are close to zero it is likely to prove exceptionally hard to keep the economy open through contract tracing alone – it would be necessary to resort to repeated shorter lockdowns. The best academic data suggests early August as a more likely date.

There are of course rays of light. The evidence is that effective therapies to tackle Covid 19 are close. The most promising could well be Remdesivir, an antiviral from Gilead Sciences (a firm in which we invest in our direct equity portfolios and so follow closely). The approval process though will still take time and whilst the drug is being used on an emergency basis in the US – and soon the UK – it will take time for the double blind placebo-based testing to be carried out on a conventional basis and then for the drug to be manufactured in bulk.

With this in mind – and with the prospect of a vaccine still many months away – it seems likely to us that the governments will resort to slightly longer lockdowns stretching into the Summer. Of course, they may not use the word lockdown. They may release us in very specific ways so as to be able to demonstrate an end is in sight. But we believe the current situation will largely persist until mid-Summer.

This realisation and the economic data that will follow it, leading to a very difficult second and third quarter earnings season for companies, gives us cause for caution. It does not necessarily mean that shares will fall back to the lows they hit in March – but it does mean that they are unlikely to make great progress in the coming quarter. We retain our cautious positioning with a highly-diversified mix of assets and no higher-risk bonds. This last point is crucial. A lockdown that lasts a month or so longer may not have a huge impact on the next 10 years for equity investors, but of course it could push more companies to default on their debt. As long as this risk persists, we will remain in protective assets other than owning the equity funds in which we believe for the long-term.

Ultimately though whilst there will be lots of reasons to be glum at the current time, we must remember the lessons of history. Stockmarkets are at their core a representation of the collective efforts and ingenuity of the millions of people who work for the companies within them. The last 100 years of data show us that whatever is thrown at people we find a way to develop strategies to cope and then ultimately use the lessons we learn to make more progress.  On a 100-year graph World War II and the Global Financial Crisis looks like blips. More importantly the waves of efficiency-savings and innovation that each triggered led to huge waves of new patents. The Great Depression birthed innovations like the Cathode-ray tube which sat in all early television sets and the modern airline industry. It was these innovations – born out of crisis – which determined the long-term path of stockmarkets not the crisis itself. And who could doubt the wave of extraordinary disruptive technological innovations which flowed over the past ten years since the Global Financial Crisis?

Whist there comes a point in every crisis where the only shrewd sounding people are the most negative and where the optimists sound naïve this does pass and ultimately it is the optimists who emerge as the winners.

As ever we encourage our investors to remember that trying to time these markets in the short-term is a fools’ errand. In the long-term we believe markets will continue their recovery backed by unprecedented government stimulus.

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