Riding the rollercoaster
Riding the Rollercoaster – where next for the markets?
After the initial falls and a sharp rally, the markets seem to be pausing to catch their breath and work out what a post lockdown world will look like. There is no clear direction and the predictions about how and when the economy will recover are varied.
What do we think will happen to the economy?
The general view is that we will see some of the largest contractions in the global economy in the second quarter, as the lockdown in Europe and the USA will cause a sharp decrease in economic activity. How each economy will rebound is the great unknown, as some predict a slow cautious recovery and others a rapid recovery within six months.
Our view is that the economy will rebound but it will take about 12 to 18 months to regain stability, which will be dependent on the development of a vaccine to provide security against a further outbreak.
What will affect the speed of the recovery?
The key is confidence. The greater the confidence of the population to resume their normal activity, the faster the recovery. Consumer confidence will boost that of business owners to re-hire staff, who in turn will go out and make their own purchases, further boosting business. A virtuous circle of growing confidence will help the economy recover.
What could hold back the Virtuous Circle?
Firstly, not all parts of the economy will benefit from an immediate return of confidence. Some areas, such as property purchases or larger expenses such as buying a new car, will take more time to recover as these are larger and longer-term commitments and require a greater degree of certainty.
The second problem is that not all businesses can start up immediately. A hairdresser, for example, can open on a Monday morning and see their first client within minutes of opening, but other companies have longer lead times between opening and starting to generate revenue.
The third problem is where there is a change in behaviour due to Covid. This is especially true for travel and tourism, which could be hit by business clients making greater use of virtual meetings, whilst holidaymakers may seek to avoid flying and decide to stay closer to home for the time being.
The final problem is that somebody has to pay for the large amount of debt the government will have amassed during the Covid crisis. There needs to be a balance between ensuring the debt is repaid, but also not holding back the economy in either the short or long term. If governments are too fast at raising taxes or not good at ensuring the tax burden is spread fairly, this could delay or destroy the recovery.
How will things change?
History tells us that recessions will kill off the weaker companies leaving the stronger ones in a better position to grow. However, history also tells us a crisis will often mean that rules and established practices will also be reviewed and changed.
The winners will no doubt be companies who offer online meetings and retailers with a strong online presence. Both have benefited from our inability to travel and the forced imposition of working from home. This will result in a failure of some already weak retailers and others will adjust their property portfolios to reflects changes in demand.
We expect to see governments seeking a fairer share of tax revenue from large multi-national companies, who have often reduced or eliminated tax liabilities with complex and legal use of tax avoidance measures. Efforts in the past by France, Spain and the UK have been held back by lack of international solidarity, but with the need for funds to repay debt and the governments having assisted many large companies through recent times, there will be greater urgency to address this issue.
What investment opportunities are you looking at?
Investment Trusts have started to offer good discounts to their Net Asset Value after the recent market movements. Some Trusts may be hiding surprises in their unquoted investments, but many larger Trusts offer good value for money with the return of discounts in excess of 10%.
Medium size companies should also benefit from a greater regional focus at the expense of their multi-national counterparts, as they can tap into a greater demand for local production.
Income producing assets should offer good value once companies are in a position to restart dividends. Some companies have reduced or ceased dividends to prudently assist in their survival in uncertain times. Once it is clear that their survival and profitability is no longer an issue, they should start to pay dividends again and the markets should re-rate them to reflect this.
What is keeping you awake at night?
Like a child, we have two reoccurring nightmares – Brexit and Trump. On the former, Covid has done something nothing else could do and got the UK to forget Brexit, but it is still there and needs to be addressed. We hope that recent events result in a quicker and more amicable solution which doesn’t unsettle the already weak UK and European economies.
With President Trump, we can already see that many of his decisions are focused on his desire to get re-elected in November. This is resulting in policy which appeals to his core electorate in the short term, rather than what is in the best interest of the whole of the US in the longer term. Scarily, many of his comments are against other countries and global organisations, such as the World Health Organisation, which may look good in the US but are damaging the USA’s standing internationally and could hold back a global recovery.