As the coronavirus crisis continues, our chairman Keith Thompson shares his insight on the news and markets from around the globe:
On behalf of myself, Ron Walker and all of the team at Clarion, I hope this pre-Easter update finds you and all your family and friends in good health.
The human tragedy that is Covid-19 marches on relentlessly and our thoughts and prayers are with all those who have suffered and are suffering. We also wish a speedy and full recovery for our Prime Minister, Boris Johnson.
Spread of the coronavirus Covid-19 persists, with Europe and the United States now very much the epicentres of the outbreak. At the time of writing, the number of cases worldwide are now 1.4 million with deaths, sadly, in excess of 77,000.
However, thanks to the social distancing and lockdown measures put in place by various governments there does seem to be light at the end of the long dark tunnel with daily new infections and deaths in Italy falling significantly. There are also promising signs in Spain that new infections and deaths have reached a plateau.
Even better news in Italy is the fact that reports confirm the target of bringing down the reproductive number (RO) to 1 has been achieved. Earlier in the epidemic it was as high as 3. The target now is to bring the RO down to below 1. An epidemic with an RO of below 1 will gradually disappear.
In Italy, the experience of the two regions where the epidemic was first reported, Lombardy and its close neighbour Veneto has been vastly different. Lombardy has a death rate of 17% whereas in Veneto the death rate is “just” 5%. Virologists suggest the death rate in Veneto is closely linked to the higher level of testing and possibly also to Veneto’s reluctance to hospitalise. This demonstrates the unpredictability of the disease and the correct measures to contain the spread are vitally important.
It is an ugly statement indeed, but death is a lagging indicator. If the rate of increase of deaths in a country is actually falling day by day, it suggests that the turning point in the fight against the virus has been reached. Looking at it dispassionately this is good news for stock markets which are a discounting machine for the better times that will ensue.
Global equity markets are now firmly into the relief stage of the response to the coronavirus. This does not mean that markets have necessarily yet hit the bottom but the signs are encouraging. The rally of the last few days suggests that the initial “panic” phase and distressed selling is over. Investors now feel that they are reasonably well positioned given the intense levels of uncertainty surrounding the pandemic.
With people around the world growing ever better at understanding the dynamics of the pandemic, glimpses of light from the latest numbers have inspired the latest rally in stock markets.
This also implies guarded confidence that the extraordinary response by the monetary and fiscal authorities around the world has averted an immediate crisis and will be sufficient to keep economies and companies on life support until lockdown restrictions can be gradually lifted and we can return to normal life.
The passing of a major fiscal stimulus package through the US Senate, which includes plans for the government to send money directly to most US nationals, has been one driver of the strength in stock markets. Additionally, the US Federal Reserve stepped up its backing for the US economy and financial markets by revealing a wide-range of actions, including capabilities to purchase corporate bonds; something it did not do even during the financial crisis.
Financial regulators have freed up firepower of $500 billion of capital for banks around the world to help them absorb the impact of the Covid-19 pandemic. By relaxing the capital requirements in recent weeks, central banks have tried to keep credit flowing to businesses and households in an attempt to mitigate the economic damage caused by the mass quarantines put in place to slow the spread of the virus.
Business survival is a race against time but with £330 billion of business loans being guaranteed by the government and universal credit benefits being granted to almost 500,000 people, the Government and Central Banks are doing everything in their power to avoid permanent damage to the economy.
Companies are providing regular business updates which can be very informative as to how the situation is developing in different parts of the world, whilst also providing insight into consumer behaviour during the crisis. For example, Nike’s Q3 earnings released last week are a good example. The company reported that stores in China are reopening and that sales at some locations have reached pre-crisis levels indicating that the if the virus can be brought under control, economic activity can rebound quickly following periods of lockdown, potentially offering a positive example for other companies and other regions.
Nike’s results also included a sizeable increase in online orders in China, driven in part by increased usage of the Nike Training Club App, an indication that people are looking for ways to exercise at home whilst on lockdown.
In the UK, Dixons Carphone reported very strong online trading as people have been preparing to work from home. US toy and board game maker Hasbro, the publisher of Monopoly, has seen “great demand” for its products according to its CEO, as people look for ways to entertain themselves whilst trapped indoors. In a similar manner, shares in Electronic Arts, a leading video game company, have held up well during the recent market difficulties.
Orsted, the renewable energy company, reiterated its full-year guidance last week stating that its asset base is fully operational, and its construction projects are progressing according to plan. E.ON, Europe’s largest operator of energy networks, stated that while there will be some impact on the business, the company is less exposed than those in other sectors, and that it expects growth drivers for the business, such as the installation of climate-friendly infrastructure, will be even more crucial post-crisis.
These examples are not intended to suggest that the coronavirus outbreak will not have a substantial impact on companies across the world, undoubtedly it will, but that the effect will be more nuanced than some of the wholesale selling that was seen in the equity markets suggest. Some companies in the most defensive sectors, such as utilities, should see less of an impact than others, as will those with long-term structural growth drivers.
There will be corporate casualties of course but the best companies with strong balance sheets will survive and prosper when we come out the other side of this destructive period in all our lives. The world will be different, and in some ways much better, and when we look back we will recognise this period as one of great innovation. Lots of things are going to accelerate, both good and bad. Consumer behaviours will change, not just in the short term but also over the longer term as well.
And so, we at Clarion continue to advocate taking a long-term thematic approach to investing – identifying funds seeking to gain exposure to high-quality companies that have strong structural growth drivers. These themes will change over time and yesterday’s trends will almost certainly not be the same as tomorrow’s. But we believe that this approach, allowing our Fund Managers to take a step back to consider where companies and sectors will be in three, five or maybe even a decades’s time, will stand our clients in good stead in times such as these.
Stock markets are likely to remain volatile in the short term but it seems likely that we will have a burst of hedonism on the other side of the pandemic as the world, and especially the young, celebrate deliverance.
For now, as a holiday weekend approaches, we are able to enjoy some relief at the better news in the fight against the virus and a more positive reaction from stock markets.
Very best wishes for an enjoyable Easter. Please stay safe and stay well.
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