April 06, 2020
The world is still in the thick of a pandemic that is as relentless as it is tragic. While the human cost is immeasurable, the virus has inflicted acute pain on almost every asset class. Even traditional safe haven plays such as gold have suffered with investors and companies hoarding the US dollar just like households are stockpiling pasta.
It is understandable that investors have been practicing social distancing from risk assets and making a beeline to cash, especially when almost every news outlet is spreading sheer panic about the potential fallout that mass quarantines will have on the economy.
It is safe to expect terrible macroeconomic readings through Q2. Already some of the impact from mass quarantines is starting to filter down into the data and it’s not pretty. The US is both the economic engine of the global economy and the new epicentre of the virus. US weekly jobless claims jumped to 6.64 million in the week that ended Saturday 28th March – that is more than double the prior week’s report, which itself reflected filings that more than quadrupled the previous record. The manufacturing ISM reading has fallen into contraction territory (49.1) with almost all subcomponents showing a material deterioration of the US manufacturing sector with output, employment and new (export) orders at the lowest levels in years. The anomaly was “supplier deliveries” which came in at 65.0 versus expectations of 57.3, reflecting supply chains in deep disarray, rather than a spike in demand. With manufacturing in disarray, we can’t look to US consumers to save the day, as they are largely confined to their homes. This same issue is echoed in Europe.
However, what we also have to consider, is the fact that this unprecedented crisis is being met with an onslaught of monetary and fiscal measures, coming from all around the globe in unison. Because of this policy crescendo, our base case scenario envisions that the economy will not remain on its sickbed. Though we have already entered into a deep recession, the world’s economic coma is indeed government-induced. Once restrictions are lifted, if authorities have, with their mass firepower, managed to avert a series of bankruptcies and lay-offs, consumers will come out of their hibernation, businesses will open their doors again and the economy will slowly revive itself.
That’s our central scenario: a recession that is deep, but brief. The projections of the IMF are congruent with this view, predicting a rebound in 2021, one that may even be “sizable”. In light of this, we have refrained from selling with the herd, and rather, when the sharp decrease in market value reduced the size of the equity portion inside of our portfolios, we took advantage of more reasonable valuations and topped it up with the addition of quality names (characterized by low leverage and high free cash flow levels). At the end of the day, large blue chips and household names will weather this storm. While governments and central banks do their part to shorten this downturn, we also have a role to play. Ultimately, the more we practice social distancing, the flatter the curve of infections will become, and the quicker we can declare victory over coronavirus. Our grandparents were called to war, we are being called to stay on our sofas: We can do this. True, it may feel like we are in the 1993 movie Groundhog Day in which a weatherman gets caught in a time loop, repeatedly living the same day over and over again. However, like the character who starts using the days to better himself, learning how to play the piano, to sculpt ice and to speak French, we can use this rare holiday from reality for self improvement. As wealth managers, that’s probably the best advice we can give at the moment. Stay busy, try to avoid looking at the sea of red across the Bloomberg terminal and keep your long term investment objectives in mind. This will pass. When the numbers show some light at the end of the tunnel, equity markets will have already rallied and those on the side-lines will probably be too late to catch the wave.
Author: Group Investment Office