Coronavirus - our perspective
Clients are of course concerned about the financial implications of the COVID19 virus and the following is our take on this from a financial and economic perspective only:
Short Version
We had previously said that we felt it unlikely that the virus would be contained and European figures now bear this out.
If the virus spreads then ultimately there will be no point in restricting travel or delivery of goods and business generally. If it dies out then all is good.
We can only look to what has happened so far and it is interesting to note that the Chinese rate of domestic infection has slowed to almost nil and more importantly they are getting back to work.
Whether the virus dies off or whether travel and social restrictions are lifted (because they become redundant) the World will get back to work - or starve. The virus is not 100% deadly but starvation is.
From an economic viewpoint when supply restrictions lift (as predicted above) demand will surge and suppliers and logistics companies will seek to recover lost profits by putting up prices. This may lead to inflationary pressures, however Governments will be loath to impose monetary controls or increase taxation, for fear of stifling growth.
The combination of knowledge (of what is happening) plus increased profits will ultimately lead to a bounce in equity prices.
Long Version
The Chinese experience seems to indicate people will catch this virus and the majority will get over it and get back to work which will cause economies to recover.
Many companies are still making profits because we cannot do without them (food, light, heat, communications etc.) – if for example their share values fall by half but dividends are maintained (or even increased with demand) then their dividends effectively double in value and possibly more. If alternatively companies re-invest dividends, then their value rises. This against the background of Governmental intervention causing falling interest rates and hence returns to savers paid by banks on their savings.
If increases in prices lead to inflationary pressure this impacts even more on those who hold monies on deposit. Governments will be loath to take any action that will affect recovery.
We feel that politicians sometimes look more to their own popularity (re-election likelihood) and may avoid hard decisions which are unpopular, however when the alternative is economic doom and the COVID19 becomes less fascinating (newsworthy) and the plight of small businesses comes to the fore opinion will change and we will get back to work. Hopefully the selfish behaviours of the few will be balanced by an increased spirit of co-operation between people (please forgive me this personal comment).
03/04/20. Please see the linked article from the BBC which takes a pragmatic view of the situation - in particular the section 'What about the impact of the lockdown?'
We have seen situations that affect financial markets in previous years and the ones that had the most effect recently were the 9/11 attacks (2001), SARS (2003) and the 2008 banking issues. The only guide we have to the future is the past, and in this regard please see the illustration below which looks at so-called 'Black Swan' events.
Options Open to Clients
Switch to cash - This is an option BUT markets now move far more quickly than historically has been the case. We as advisors take on clients for the medium term plus; that is to say for five plus years. There are investment managers who make decisions on a daily even an hourly basis but statistically they get things wrong as often as they get things right – ‘timing the market’ is very tricky if not impossible. To use a further example we have seen rises and falls as great at 10% in equity markets in just one day and trying to forward guess this is pretty well impossible – if you switch to cash at a low point there is a real danger of missing any bounce – you will lock in your losses. See timescale comment in next paragraph.
Stick with it - Providing your timescale is still long and you do not need to make significant withdrawals now then we believe that recovery will happen comparatively soon. Our clients are invested in funds and the managers of said funds will be looking to re-position their holdings over the coming weeks and this is likely to be helpful. At the time of writing most of our clients have only effectively lost just over one year’s growth because we diversify widely across a range of assets – see Investing / Asset Allocation tab on this website.
We feel that folk will start to get inured to this and when we pass the point of maximum fear things are going to change – if the Chinese pattern is followed this could be relatively soon.
As always call for a chat with us if you have concerns.
Steve and Martyn.
