Week beginning 23 March update number 2

On Tuesday the UK went into lockdown. We put in place our business continuity plan and we have quickly adjusted to remote working and we continue to manage investments to the very best of our abilities.

We have noticed a marked shift in discussions even in the last couple of days; a small sense of optimism.

This week we have spoken to over 15 fund managers and investment professionals. Our aim is to share the most interesting aspects of these calls. We are writing up the fund manager meeting notes and we will be adding these to the website over the coming weeks.

JP Morgan (Economic Team)

Like the views from Invesco in our last report, they see the three areas to watch as:

Whether the infection is contained
Fiscal policy
Monetary policy

They believe that significant progress has been made over the last week:

We are seeing shutdowns in Europe – what we need to see is whether infections reduce, and more stringent action in the US
In China and South Korea there is a return to normality and infection rates are not accelerating – what we need to see is that the infection rate remains low as activity normalises
Fiscal stimulus – massive packages have come out across Europe, the UK and the US – this is seen as very positive
Monetary policy – sorting out liquidity issues, backstop government bond markets and helping to ease credit market tensions

In terms of what this means for global growth the chart from JP Morgan is really helpful:

	Q1 ‘20	Q2 ‘20	Q3 ‘20	Q4 ‘20	2020	2021
US	-4.0	-14.0	8.0	4.0	-1.8	2.3
Euro-zone	-15.0	-22.00	45.0	3.5	-3.4	4.7
China	-40.8	57.4	23.9	5.5	1,1	9.8
UK	-10.0	-30.0	50.0	2.5	-3.7	4.1

Although JP Morgan are happy with the fiscal response across Europe, they have concerns with the US.

The main concerns they see are:

Unemployment in the US and how fast the job claims go up (latest figures had a record spike of 3 million)
How all this fiscal stimulus is distributed to those people who need it and whether this protects jobs
The impact on earnings for companies, both in the short and long term
When supply is switched on and whether demand can match this

Aviva (Economic Team)

The first message focused on what has happened in the last month:

The magnitude of the volatility within markets took everyone by surprise, although this has started to ease
The markets seemed to have ignored what was happening in China and perhaps expected Central Banks would protect them
It became clear that this was not a market imbalance; this is a pandemic across the globe and a central bank cannot give us a vaccine!
Human behaviour can and will drive markets
The economic impact will be temporary but there are lessons to be learned, linked to the human response to events
New risks have emerged around companies with high people exposure, i.e. those sectors which bring people together in large numbers; this includes the high street, airports etc
Winners are likely to be social infrastructure, fibre/broadband, renewable energy etc

The areas they are trying to understand include:

The impact of the speed and types of intervention by Central Banks and in particular where do we go from here. Likely to see increased government debt and interest rates remaining low for a significant period. Between 1929 and 1950 interest rates remained flat and low, this could be the same
Consumer behaviour will change, and there will be structural shifts. Examples include – remote working is likely to accelerate and this will expand the need for flexible working, the use of offices will need to be rethought and perhaps impacts the length of leases and space, the impact on travel is less certain, how people are educated (especially universities), the rise of the 4^th utility (fibre), onshoring and protecting supply chains, tech will likely come out stronger (e-commerce, gaming, home working) etc
Impact on dividends from companies in the short and long term, as they look to make short-term savings in cash flow

Positive messages:

It is temporary, there has been mass selling without looking at fundamentals. There will be winners and losers. People will go to the pub again, and they will go on holiday
There is likely to be a great focus on how we look at our planet and sustainability
There is likely to be more involvement by governments in markets and society
Human behaviour inclines towards de-risking, but the best thing to do is hold steady, and be prepared to invest because there will be many opportunities

ASI (Economic Team)

The main observations are:

When we come out of this it will be a very different environment
Governments are now understanding the importance of fiscal policies and these have increased significantly
Much of the potential growth in 2021 will depend on whether fiscal and monetary policies can keep the global economy intact and jobs in place
They believe that markets are struggling to digest news, but they think most of the bad news is already in the price of assets, this doesn’t mean they have hit the bottom
At this stage they can’t gauge whether this will be a 3- or 18-month recession
China is a good guide to what happens next – there has been a return to normality relatively fast, the Chinese markets have held up well but what is not clear is the potential earnings damage

T Rowe (US Team)

The US is looking like the new epicentre of the pandemic, below are some thoughts from the T Rowe team who are based in the US:

From a positive standpoint they highlighted that although the virus is terrible, it has a life cycle and there will be a vaccine at some point
Unlike previous recessions this has not been brought about by debt and exuberance – this is not a credit bubble. This is something that has forced the global economy to stop, such that companies have fixed costs but zero revenues (for example a shop has the costs of staff, rates, rent etc but no money coming in to pay that)
The world was sick of monetary policy which raised the value of asset prices and benefited the rich. This is all about fiscal policy which helps the average person
They have worked through the financial crisis which they saw as terrifying with the collapse of financial institutions, and Americans losing their homes – they don’t feel this is the same
This will not last forever, there are reasons to be optimistic when we come through this

Templeton (Emerging Markets Team)

Taking a view from Emerging Markets:

This will pass, things will recover, but the environment will be different
Volatility is extreme, over the last 8 days the emerging markets index has moved + / – 4%
Some of the changing themes will include supply chains and behavioural changes (the use of technology, online training etc)
In China things are normalising with online spending almost back to normal levels, migration trends are picking up, manufacturing is starting to normalise. Areas like home sales, car sales, travel will be slower to recover. There is no vaccine yet so there remains a risk, but the rest of the world is in lockdown which reduces that risk
Expect a significant downgrade in earnings and then there should be a recovery, but the world will be different, and this will only become clearer over the coming months

And finally

Below are some useful articles:

Black Swan events: Shirt-term Crisis, Long-term Opportunity – click here

The 7 Best COVID-19 Resources We’ve Discovered So Far – click here

COVID-19 Crash: How China’s Economy May Offer a Glimpse of the Future – click here

UK has enough intensive care units for coronavirus, expert predicts – click here

Has half the UK already caught COVID-19? Probably not – click here

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.