Have markets recovered too far, too fast?

I don’t think so, no.  Markets in March had lost all confidence in the face of economic shutdowns across the developed world and a complete lack of clarity about economic prospects.  As economies have slowly begun to reopen, markets have regained some composure.  However, markets are still some way below their levels at the beginning of the year, with the benchmark UK Index, the FTSE 100 Index, still down by more than 18% so far in 2020.  Other indices, notably the US, have fared better, but this is as much to do with the companies that are listed there than any economic outperformance.  As for the UK, a very “services” related economy was particularly vulnerable to a shutdown and uncertainty over future trade relations with the EU have further soured sentiment.

How much has this all cost?

Back in March, the World Economic Forum (WEF) thought that the slowdown in the global economy caused by the coronavirus outbreak was likely to cost $1 trillion.  By May, this figure had risen to around $3.8 trillion and recent estimates are around $6.3 trillion – who knows where it will end.  All of the major economies have announced these eye-watering stimulus packages, aiming to protect jobs and to boost economic growth as economic growth – especially in the retail and restaurant dominated service sectors – has ground to a halt.

 How will it all be paid for?

For now, that is a problem for another day – these unprecedented measures are in reaction to a situation that is, itself, unprecedented.   The record levels of government borrowing are possible because interest rates are so low, but this also makes any rise in interest rates very hard to see over the short or even medium term.  In the meantime, bond purchasing programmes and inflation should take care of at least some of the debt.  Tax rises over the medium term feel inevitable, but for the moment anything that is going to slow the economy is not on the agenda.  These pressures can be inflationary, of course, but the overwhelmingly deflationary effects of the economic slowdown make that, again, a potential problem for another day.  So, for now, we will keep shaking the magic money tree as we emerge into a new world.

 How do we get there?

Think of this as a play with three acts.  The first act was the period at the beginning of the year, from the initial measures taken and ultimate shutdowns of most of the global economy.  Act 2 – where we are now – is the period of reopening, where we will have a series of measures taken to slowly unlock the economy.  As I have said before, this will not happen in a straight line and there will be setbacks – as I am sure the residents of Leicester will confirm – along the way.  But this pattern of local restrictions and lockdowns will be the way going forward, in my opinion – the economic pressures of shutting down the economy as a whole are simply too high.  As Boris Johnson is quoted as saying, “who would have thought that taking away people’s liberty would be so easy, but giving it back so hard?” Ultimately, we will develop a vaccine, establish herd immunity or simply learn to live with a new virus and deal with it accordingly.  Part of the success story of homo sapiens is its ability to adapt and to change.  Act 3, then, will be the establishment of this new normality.

What will the new normal look like?

The six trillion-dollar question (that’s inflation for you)!  An article by the World Economic Forum reported that Coronavirus could trigger the largest ever annual fall in CO2 emissions – bluer skies, smog free cities and pedestrians and cyclists replacing cars have all contributed to this.  Will it continue?  The EU has pledged that its €750 billion economic recovery package will focus on wind energy as one of the policy fundamentals of a Green recovery for Europe and it seems certain that some of the trends that were already happening will see their progress accelerated by the changes over the last few months.

Certainly, the trend to more home working does not look like one that will end abruptly.  This increased use of computer software for meetings has profound implications for a number of sectors – the airline or train companies carrying less passengers, the hotels putting up less guests, the Real Estate companies finding that their clients are looking for smaller offices.  It doesn’t stop there, of course.  You only have to see how city sandwich provider Pret has seen its demand collapse.

So, will councils have to employ tumbleweed clearers to keep their deserted city centres clean?  I think this is probably overdoing it as well.  Effective and efficient as electronic communication is, it is hard for social animals like mankind to replace face-to-face contact.  Body language is, after all, a language in itself.  There will remain a demand for good quality property in good locations, just not as much as there was, perhaps.

What does this mean for investments?

As ever, I think it is essential that we focus on the quality of the investments that we hold and the longer term prognoses for the industries that they operate in.  People will, ultimately, fly again, but will we need shopping centres and high streets in quite the way that we did?  Some companies that have seen sharp falls in their share prices will recover, but many, I fear, will not.

Equally, the economies of the Far East – perhaps because of their experiences during the SARS and other epidemics over the last twenty years – have not suffered in quite the same way as Europe and the US.  This marks another step in the transfer of economic and geopolitical power away from the “Old World” to the “New World”.  This is not to suggest that we should be writing the obituary of the “Old World” just yet.  Many of the companies that are at the vanguard of the changes we are going through – from Solar and Wind Power, from Cloud computing and teleconferencing, from New Media to Electric Cars are based in the Old World.  It is just that for every Amazon, the US retail giant, there is now an Alibaba, its Chinese equivalent.

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