As always, we sincerely hope that all our clients, their families and friends are managing to stay well in these unprecedented and challenging times.
Putting to one side the human tragedy and cost in terms of lives lost and health care, there is no doubt that as investors we are living through challenging and unsettling times. The economic news flow is likely to get worse before it gets better and so, as we brace ourselves for another month of trading in global stock markets, it is perhaps useful to pause for a moment of reflection. To reminisce is to revere.
In January, pre-Covid 19, UK business confidence hit a five-month high whilst unemployment was at a record low. The UK CBI (Business Optimism) survey saw its biggest quarterly upward swing since 1957. In the US, job numbers were strong while housing permits rose to their highest level since 2007. In India, industrial production had improved at the fastest rate in 12 years and China was continuing to expand at rate of 6%+ per annum, a growth rate to which we in the West could only aspire.
Then the coronavirus, which had supposedly started as an isolated and contained epidemic in a little-known region of China, began to move west. Governments, perhaps because of confusing messages and data from the Chinese authorities, were unprepared for the pandemic tsunami which followed. February, when stock markets peaked, seemed to pass in a blur. It was a transition month with the initial mild concern about the potential impact of the virus accelerating to the full force of the Covid 19 pandemic in March.
As if the problems created by Covid 19 weren’t bad enough, chaos erupted in the oil markets with Saudi Arabia and Russia deciding to cut off their noses to spite their faces by embarking on a massive oil price war in the midst of a collapse in demand.
In the 10 days between the 6th and 16th March the UK stock market fell 23%. The fall from the peak in mid-February to the trough in mid-March was 35%. Records fell even faster than stock markets as investors went from indifference to outright panic in just three weeks. It was the quickest and steepest drop on record. It felt like investor capitulation was at its peak. The West was well and truly in the eye of the storm whereas most of Asia had passed through the worst. We should look there for clues as to how economies will recover from here.
But stock markets have the capacity, in the short term at least, to make even the most experienced investor look foolish. Humility and an eye for the long term should always be the watchword. In the midst of all the doom and gloom, markets suddenly turned positive and a rally, often referred to as a relief rally, followed almost as quickly as the downturn. Markets quickly regained almost half their losses with rises on some days being the biggest in history.
What caused this sudden change in sentiment?
The Federal Reserve Bank of American rode to the rescue of financial markets, as it has often done so in the past. The Fed has the ability to print money so it is best not to ignore them. The scale of the assistance from the Fed, and other central banks and governments throughout the world, dwarfs anything seen previously. Central Banks and Governments seem determined to do everything possible to protect their economies and restore stock markets to previous levels.
A few weeks ago, there was every chance of a financial collapse to match the one that followed the 2008 Lehman Bank disaster but a credit crisis has been avoided because of the massive fiscal and monetary stimulus. This in itself justified a stock market rally.
An all-out medical crisis seems to have been averted. Social distancing is working and treatments are on the way. Public health authorities have a handle on how to contain the problem and several different avenues of research appear to be leading to viable treatments. New infections and deaths appear to be peaking in many countries and there is promising talk of a gradual return to economic activity.
The price of oil has tanked and little seems likely to raise it for a while. This might be negative for the US economy to the extent it drives oil operators towards bankruptcy but Donald Trump supported by the Fed will not let this happen. The effects will be positive when the economy gets back to work. Motorists will have lower gasoline costs so the low oil price will act as a tax cut. The low oil price will also be a positive for emerging markets who are net importers, particularly India & China.
Consumers are desperate to start spending again after months of incarceration. Much of western Europe and parts of America are preparing to reopen again. Wuhan, where the crisis started, provides clear evidence that the economy can re-open within 90 days.
Despite these positive developments uncertainty remains elevated and new stock market lows and further short term volatility cannot be ruled out. Much will depend on how quickly the current severe lockdown is lifted. However, history shows that it is impossible to call the bottom and it never pays to become more bearish as markets fall.
At a time of maximum uncertainty one thing is very clear, government spending is back on the agenda in a massive way. The policy response has been truly remarkable. With 2020 effectively an economic write-off, governments are building a bridge and buying time to enable recovery to kick in from later this year and beyond. A single quarter, perhaps two, of downturn followed by a steady recovery is a distinct possibility given the massive stimulus from central banks and governments.
Economic news will be grim in coming months with what is likely to be a double digit drop in gross domestic product in the second quarter. Most corporate news will be dire but the worse it becomes the higher the stimulus. The money printing presses are working at full speed to offset the slowdown in economic activity.
Cash is likely to have its value eroded by financial repression. With interest rates now certain to stay much lower for longer and yield scarcer than ever before, sustainable income will be bid up to a premium.
Businesses will be permanently altered; Lockdowns are steering everyone towards new ways of working, shopping and playing. The digitisation of our economies, which was already happening apace, is taking a further leap forward. A wide variety of digital services, from advertising to healthcare, are likely to provide growth for many years to come.
This crisis, like others before it, will pass. In the meantime, our Fund Managers are concentrating on investing in well-financed companies that enjoy stable sources of demand, low levels of debt and consistently strong cash flows. As many of their smaller rivals retreat in order to conserve cash, these companies can continue to invest for the future so that they are poised to enhance their privileged position as the economy recovers.
Whether or not the coronavirus pandemic is short lived, it is affecting many parts of the global economy and will continue to do so for some time but just as things are never quite as good as they seem during a boom, nor are they generally as bad in the depths of a crisis. As previous commentaries have highlighted, historical evidence confirms the importance of staying invested over the long term. Trying to time the market can quite simply destroy wealth. What investors must not do is panic; keep calm and carry on is the most sensible course of action.
Research by Fidelity shows that missing out on the 20 best trading days of the MSCI World Index over a 10 year-period from 31st December 2009 (during which time the index grew by over 170%) would have resulted in negative returns of -4.6%. Meanwhile, Barclays has suggested Investors who tried to time the market from 1999 to 2019 were down 80% compared to those who had remained invested. The stock market recovery in late March/early April lends support to this research.
Nobody can accurately predict when markets will once again begin to climb the ‘wall of worry’, but the Clarion Portfolio Funds commitment to well-chosen fund managers remains robust. Accordingly, the Funds will remain invested while seeking to add value over time. Such an approach allows for the full harvesting of dividends which account for the majority of returns over time. Although dividend income has been affected by the recent cuts, the income stream remains vastly superior to deposit interest rates, rental income and fixed interest returns.
Staying invested also recognises that markets can rise very quickly once they turn a corner as was demonstrated by the recent rally from the stock market lows in March.
In keeping calm and carrying on, we at Clarion continue to closely scrutinise markets and economic news. A feature of the recent correction has been the unprecedented rise in correlation between many asset classes, including property, bonds and commodities which has surpassed that of even the great financial crisis of 2008/9. Selling across all sectors was indiscriminate as highly leveraged investors and index trackers sold anything and everything to raise cash to cover debts and margin calls.
Some areas of the market will undoubtedly take longer to recover than others, some areas may never recover at all. The Clarion Portfolio Funds are highly liquid and are well placed to weather the storm and to eventually take full advantage of the recovery when it comes.
If I may, I would like to finish on a personal note with a poem by William Wordsworth, a fellow Cumbrian, which I found in an old schoolbook when clearing out my home office during lockdown. It strikes me as speaking directly about our current predicament and gave me some feeling of solace. I hope it has the same effect on you.
Nuns fret not at their convent’s narrow room,
And hermits are contented with their cells,
And students with their pensive Citadels;
Maids at the wheel, the Weaver at his loom,
Sit blithe and happy; Bees that soar for bloom,
High as the highest Peak of the Furness Fells,
Will murmur by the hour in Foxglove Bells:
In truth the prison, into which we doom
Ourselves, no prison is: and hence for me,
In sundry moods, ’twas pastime to be bound
Within the Sonnet’s scanty plot of ground;
Pleased if some Souls (for such there needs must be)
Who have felt the weight of too much liberty,
Should find brief solace there, as I have found.
Thanks to you all for your patience, for your support and please stay safe and stay well.
Keith W Thompson
Chairman of the Clarion Group
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