There is no such thing as a rich pessimist – Max Warburg, German banker

The year has only just passed the half-way mark but the history of Covid-19 and how it should best be combatted will not be written for a long while yet. The past few months have been an exceptional time for all of us.  We have experienced challenges in our day to day lives that were unforeseeable, testing our resolve and those of our families. Global stock markets have been unforgiving and the scale of the fiscal response is genuinely unprecedented. However, after 100 days of lockdown we are now beginning to emerge from this experience stronger and more certain of our resilience. Recent events in cities around the world have taught us that humanity, tolerance and inclusion are vital if we are to create a better society in which to live.

Despite persistently high Covid-19 cases in the United States and Brazil and some isolated second spikes elsewhere, notably in the Spanish mainland, stock markets have remained resilient. Rightly or wrongly, it seems that Covid-19 is no longer the primary driver of asset markets. It is apparent there will be no further shutting down of economies other than localised lockdowns and that we are all learning to live with this virus, disruptive as that may be.

The debate has moved on to the shape of economic recovery and the influence of central bank and government stimulus measures. On both these issues there is something for everyone, bull or bear. There are regions, such as Europe (ex UK) and Asia (ex India) which have seen a rapid rebound in economic activity, whilst others such as the UK and USA have struggled. Equally there are those who believe recent central bank actions have been the most effective and timely intervention ever and those who believe they have warped investment markets beyond all recognition.

There is an epoch-defining tug-of-war going on between the unprecedented interventions of governments and central banks versus the unimaginable disruption to the functioning of the global economy caused by the pandemic. Borrowing is currently going through the roof to fund the emergency measures put in place by governments. Previously one might have said that keeping interest rates below the rate of inflation (financial repression) was desirable, now it is a necessity if these promises are going to be affordable. In short, we are entering a new regime and in contrast to the world we have lived through, the corona-crisis is the accelerant to a significant reshaping of the economy for both public and private sectors.

In stock market terms, traditional companies have significantly lagged newer technology companies.  The NASDAQ index has outperformed the DOW by over 25% year to date, while the oil price has fallen by more than 30% and the gold price has risen by 20%. The underperformance of both the DOW and oil relative to the NASDAQ are symptomatic of an accelerating shift from the old physical economy towards the new virtual economy. The outperformance of gold is anticipating years of monetised deficit spending, which will be required as governments attempt to alleviate the social costs of high unemployment as the workforce retrains for the different skills required by the increasing virtual economy

This backdrop leaves investors facing two clear challenges. Firstly, to have sufficient exposure to high growth technology companies whilst maintaining a prudent level of investment diversification and secondly to protect the real value of investments from the inflationary effects of sustained monetised deficit spending.

We believe the Clarion Portfolio Funds are well positioned for this rapidly changing economic environment. 

This optimism is founded in our long-term investment approach, which helps to put the current challenges in perspective.  Our world, not just our economies or our financial markets, is driven by the private initiative of people, whether they set up companies, develop new technologies, research new drugs, build schools or create art.  Each of those acts is an expression of optimism, and while not every effort is a success, as a whole these initiatives create progress and prosperity.

The onset of Covid-19 around the globe has changed the way we live and could have long-term repercussions for how our economies function going forward.  Exactly what the ‘post-Covid-19’ landscape will look like is not yet clear, especially with the possibility of a second wave of infections around the world and the uncertainty of getting a vaccine.

Nonetheless, there are some things we know. Covid-19 has accelerated many of the changes and disruptions we have seen over the past ten years. Investors will now have to think about how to adapt their portfolios. Many successful companies pre-Covid-19 simply do not have the same prospects now. They will need to change how they operate, or they could become obsolete.  But other companies are prospering, none more so than technology companies that have already enabled millions of people to effectively work from home. The coronavirus crisis has forced the solution on us – a ‘once in a generation’ opportunity to capitalise on the “Zoom Boom”. There is an unprecedented thirst from millions of businesses to improve efficiency. Technology and innovation will be more crucial than ever as economies begin to re-open.

Ultimately the level of stock markets will be determined by two things.

  • First, the overall levels of economic activity post the recently started recovery, as this will have a major bearing on the level of corporate profitability.
  • Second, the discount rate (itself a function of the cost of equity and the cost of debt) applied to those corporate profits.

The two are of course interconnected: the lower the level of economic activity, the longer interest rates and the cost of debt (and therefore the discount rate) will be kept low. It is only in the interaction of these two variables that a view on what happens next can be formed. Clarion, like most, are cautious about the ultimate level of economic activity until a vaccine and/or more effective treatments are found. Ultimately economic activity could easily surpass previous highs, but this may take some time and the shape of it (which companies are winners or losers) could be very different than in the past.

It is highly likely interest rates and therefore the cost of debt, will remain exceptionally low for a long time. This increases the value of future corporate profits. At current levels these two variables are essentially in balance i.e. equity markets are fairly valued. A material fall from here would be another buying opportunity, but a material rise could well be liquidity driven and, until the economy fully recovers, make valuations of more concern than currently.

We must also remember that this economic shock came at the onset of a global re-acceleration when the authorities were already easing financial conditions. This means there was less excess to get rid of during the downturn and that there will be more pent up demand to satisfy as the recovery commences. Governments have taken the historic decision in the US, UK and Europe to directly pay people for not working thus lessening the deterioration in their spending power.

The recovery in economic activity in late 2019/early 2020 was brought to an abrupt halt by the government mandated lockdowns. However, the synchronised and unprecedented actions of governments and central banks globally means that the ensuing recession and bear market was very brief – if Biblical in magnitude. We are already in a new era of economic recovery and unlike the last one this one is likely to see ongoing, significant and coordinated monetary and fiscal support. Policymakers have heard loud and clear that an approach relying only on quantitative easing (QE) helps Wall Street more than Main Street. Government spending on infrastructure and a greener future will ensure QE is going to receive fiscal back up from now on. Austerity was ending pre-Covid, the virus just accelerated the regime change. At some point we will all need to pay for the fiscal largesse but that will be for another day.

As always, we continue to monitor events closely.


We are clearly in very unsettling times with the Covid-19 pandemic causing so much human suffering and sadness.

We are all facing a difficult and uncertain six months as we and our families go back to work or school.  The degree to which we can resume our activities will depend on the progression of the pandemic and the resources we have to contain and mitigate it.

With an unresolved Brexit, a questionable competence of certain important governments, an upcoming US election as well as the likelihood of ongoing local virus spikes, the way ahead will be far from smooth. However, it is likely the worst is over (except unfortunately for unemployment which lags by up to two years) for both economies and financial markets unless there is a serious political miscalculation.

Notwithstanding these uncertainties, history shows that times such as these can offer tremendous investment opportunities, which can be exploited by active fund managers. We are optimistic because we are confident that our carefully selected managers have the prospects of delivering significant value in the long-term, despite the challenges we face.

No-one can predict the future with any certainty but one thing we can promise is that the whole team at Clarion are focused on delivering the best possible outcome for our clients from a well spread diversified portfolio of the very best fund managers.

Throughout the difficult past few months, the safety and welfare of our employees and clients has been paramount and we have had to quickly adapt our investment and service delivery to accommodate the lockdown restrictions. We are particularly pleased that we have been able to sustain our ongoing relationships with you, often through new ways of communicating. Our technology has remained resolute and new channels of communication including Zoom and Microsoft Teams have been a revelation. We appreciate your continued support and patience and, as lockdown restrictions ease further, we hope to be able to welcome you back to our offices in the not too distant future.

In the meantime, we wish the very best of good health to our clients, their families and friends and trust that we can all look forward to a brighter future.

Keith W Thompson, Clarion Group Chairman

July 2020

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