Seven from 7
We’ve all felt frustrations in recent months. Muddled messages don’t help. Clarity is vital in extraordinary times, so I’ve tried to provide clear answers to the seven most common questions we’re asked by our clients.
How bad is the mess?
Officially, 15% of the US working population is now unemployed – unofficially the figure is closer to 20%. In the UK, the furlough scheme has kept the figure under 10% for now, but for almost every nation in the world, double-digit unemployment has become a threat.
So, it’s bad. Monetary policy and government support have softened the blow, but there’s no doubt that the world has taken a hit. The global economy is likely to shrink by at least 4% this year – the worst since the 1930s. It may well have been worse without intervention, but a recession is still a recession.
And the cushion has come at the cost of increasing government debt rapidly. The UK government borrowed £62 billion in April; before coronavirus the budget for the whole year was £55 billion. Every nation in the world is racking up wartime-like debt levels as they try to stabilise their economies.
Of course, for investors, there’s not just the mess to consider, but also how the clean-up goes.
Why is the market ignoring the economy?
We don’t know. There is no edge when it comes to the coronavirus – nobody we know of has extra information, or a better model. It may be that investors have just become habituated to the “bad news is good news” cycle, by which anything negative in the economy is sorted out by the central banks pumping money.
The wave of stimulus has certainly created an air of optimism that the world won’t fall apart.
Markets seem to be looking through the immediate economic data, which is normally a sensible approach. Now though, there’s so much uncertainty around a second spike – and the timing of a vaccine – that it seems strange to be so bullish.
We don’t think over-optimism is warranted, hence our neutral position in equities. We have a number of scenarios to describe the shape of the recovery, which we outlined a few weeks ago. It’s too early to be sure which one will run its course.
Aren’t markets too expensive if there’s going to be a second spike?
On the surface, the rebound does seem to have been discerning – technology and consumer companies have rebounded, whilst airlines and oil producers have continued to suffer. That makes sense intuitively, because Amazon will survive COVID-19, while Virgin Atlantic may not.
However, Amazon’s share price is now 30% higher than at the start of the year. That does start to look expensive – while it is true that Amazon is taking a slice of the pie from physical retailers, it’s also true that there is less pie to go around.
A second spike in COVID-19 would not only shrink the economy, it would also send confidence to rock-bottom. People would lose faith in the government, in the hopes for a vaccine, and in a quick return to normal. Equity markets aren’t pricing in much room for disappointment.
Is this a good time to invest?
This question has been coming in regularly since markets began falling. In March, people wanted to know whether to wait until markets recovered. In April, people wondered if they should wait for a pullback before investing.
It’s the wrong question to be asking. It shows a need for a long-term investment plan. An investment plan should keep you on track for the long term, making sure you meet your goals. A well-designed one ignores short-term market movements because it is focussed on the overall outcome, rather than the day-to-day ups and downs.
How will the crisis affect Brexit?
The crisis put Brexit into perspective. Loss of human life trumps trade deals – as it should. However, there aren’t likely to be too many direct impacts, other than the understandable possibility of delays.
COVID-19 won’t affect the eventual shape of the deal too much. The crisis has done nothing to improve relationships between the EU and the UK, but it hasn’t done too much to worsen things either.
Trade negotiations have slipped down the agenda for both sides – but as lockdowns end, normal course of business will be resumed. There’s still a long way to go though and lots of questions remain unanswered, of which perhaps most pertinent still is the question of the border on the island of Ireland. That’s nothing to do with the pandemic, and is still a problem without a solution.
What does this mean for income / dividends?
This year, dividends globally will be poor. Some companies are being asked not to pay dividends by governments, while others are taking the opportunity to conserve cash, so cancelling theirs as well. UK companies have cut an estimated £30 billion of dividend payments so far – and that’s based on earnings accumulated last year!
Next year, dividends are likely to be poor again. Even if the economic environment is more favourable, earnings will be lower – so there’ll be less to pay out.
Over time, normality will return. However, over the next couple of years any investment strategies that rely on dividends for income are going to face challenges – which is why we adopt a total return approach to managing money.
How will the world look post-COVID and how we are positioned for that?
Predictions about the future are easy to make. Correct predictions about the future are a lot harder. We just don’t know what kind of future we’re talking about – there’s a big difference between a world with a vaccine and one where COVID-19 is still a threat. We don’t think the world is going to fall apart, but we also don’t think we’ll wake up tomorrow and find we’re back to 2019. There’s a lot of room for error with timings and on outcomes.
When we don’t (or can’t) have a view on things, we return to our process. In the middle of the crisis we identified and bought a few assets that were clearly pricing in Armageddon (high yield bonds, European dividends), but since the middle of April we’ve been content to move our equity position back towards neutral.