The Long Road Back to Normality

5th May 2020

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This Sunday we are told that Boris Johnson will explain to us how we are to be released from our confinement.

Our modelling suggests that on the current trends we can expect the number of new cases of Covid-19 occurring daily within the UK population as a whole to fall to around 1,000 by early June. It also suggests that around this time the daily tally of new recorded deaths from the virus will fall below 100.

This leads us to believe that whilst there will be some easing announced in the coming weeks the majority of the lockdown will stay in place until around the middle of June. Of course, this is based upon assumptions and trends which can change.

The big economic question now though is not so much when this lockdown will end but rather how will companies and individuals respond to the ‘new normal’?

History teaches us that after these big crises we all become more cautious and seek to keep extra cash stashed away because we have seen what a rainy day looks like. We expect consumers to be highly cautious for a prolonged period of time after the end of lockdown and this will just be one factor supressing economic growth for the months and years to come.

We measure this by looking at the savings rate. When GDP falls people save more, when it grows consistently, they save less. The graph below shows what the Global Financial Crisis did for our savings rate, and the run-up to the Brexit vote. We can only imagine what this crisis will do- the data has not yet caught up with reality to tell us. However, it is likely to lead to a spike well above anything seen before.

In this crisis though it is not just households caution that will be profound around spending. Companies will also see cash as king and want to keep their cheque books stashed away. This is likely to happen on a far greater scale than in other crises.

One of the principle reasons for this is that this time companies have been able to furlough many millions of people. In essence this gives them a chance to work out whether company can cope without these workers. One fund manager in which we invest, James Dowey who manages the Liontust Global Equity fund, put it like this:

“It could be quite a hard slog out of this crisis on the other side. Companies have found efficiency gains and they are going to want to be cautious. Their balance sheets have taken a hit. Likewise, households will want to be safer. We’ve all saved a bit of money because of what we have not been able to do, and that’s welcome. But if you run your own business you’re going to be thinking ‘I did well to get through this but what happens next? If you’re an employee, you’ll be thinking; how safe is this company that I work for?

‘That’s going to mean that you step back and increase your precautionary savings. There may be an initial surge of spending – we will all be queuing at B&Q when lockdown ends - but beyond that we move from a phase when the virus is a driver of behaviour to one where it is basic economics.’

These hard economic times do not always mean hard times for markets. As we have said throughout, markets tend to recover ahead of the economy. This has proved accurate. For markets to make much progress from here however it will be crucial to understand how large this recession will be, and we are still some time from knowing that. Economists have never disagreed as much as they do today about what the next year will look like.

So how do we adapt your portfolios to prosper in this environment?

Firstly, we acknowledge that the economy is going to experience falling prices (deflation). In a deflationary environment we can expect bond prices to rise and the yield paid on bonds to fall. This is because low interest rates and cheap money make those payments from the bonds worth more in relative terms.

In the heat of the crisis we were not willing to take advantage of this opportunity because we were concerned about how liquid these bonds were. Now however central banks have begun massive buying of bonds which supports them. For this reason, we have begun purchasing bond funds which can benefit from tough economic times.

Secondly, when times are tough it is vital to pick the winners. This includes those companies that are able to be disruptive in a crisis. Think Amazon’s ability to keep selling whilst high street shops were shut. Or zoom’s ability to host conference calls whilst office block landlords were struggling. To capture this change we have purchased James Dowey’s fund. He is looking for those companies that can prove winners from the crisis.

As always being flexible and nimble in this crisis will be vital. No portfolio that has lost value brings us any joy whatsoever, but we are pleased that the portfolios have managed to benefit from much of the market recovery over the past month. We continue to work diligently to ensure that they are well positioned to deal with this tough environment.


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