After a while, living in lockdown comes to seem almost normal. A surprising number of people have found they can work like normal from home. Supermarket shelves are a little less empty, and the queues are quite sociable. You get used to avoiding people and their dogs in the streets. And even pub quizzes are beginning to go virtual!
And yet, the world remains highly unsettled. The US has now suffered over 3,000 deaths from COVID-19, and last week an extra 3 million of its citizens registered for unemployment benefits.
In the UK the number of cases has passed 22,000 and 260 people died on Saturday alone. Boris Johnson, Health Secretary Matt Hancock and Chief Medical Officer Chris Whitty have all shown symptoms of COVID-19 and are isolating. To top it all, Deputy CMO Jenny Harries has warned that life might not return to normal until the autumn.
The good news, though, is that the new case numbers might be peaking in those parts of Europe where they first began rising. New case numbers look as though they’re falling in Italy. Spain, Germany and the UK are not far behind. Lockdowns work.
Meanwhile, markets are unsettled. Last week seemed to follow the same pattern of its predecessors. There was lots of green on the screen in the middle of the week, followed by a dip on Friday. Over the weekend oil prices hit an 18-year low at less than $20 a barrel, spurred by the lack of demand. Oil markets are now pricing in a sharp global recession. Other risk assets are waiting nervously to see the full extent of the virus in the US.
At 7IM we are realistic about the short term and optimistic about the long term. When markets fall sharply, we expect our portfolios to fall too – we can’t avoid all the pain, that’s what taking risk is all about. But our portfolios have held up well and, more importantly, they’ve performed as we expected.
Diversification is at the heart of our investment process, and has been for the last 18 years. Once again, it helped to protect our portfolios from the worst of the market falls. At its nadir the FTSE 100 had lost 35% since the start of the year. Thanks to our diversification in assets like alternatives and bonds, 7IM Balanced portfolios fell by less than half of that.
We are also optimistic about the opportunities we are seeing. Many assets are far less expensive now than they were in January. But we have to be careful that what we are buying is good value and not just rubbish. Some ‘cheap’ stuff will go to zero in the next year or two.
One area that attracts us is high yield bonds. Currently they are paying about 9% more than government bonds – the highest spread since 2009. This means you can earn 9.5% a year when lending money to these firms, rather than paying the German government 0.5% for the privilege of lending to it.
Some companies in the high yield space will go under (fossil fuels? airlines? speculative property companies?), but most will survive and pay their debts. Over the coming weeks we will be positioning the portfolios to take advantage of such opportunities – more on that tomorrow.
Above all, we are optimistic because we believe in our investment process. Our portfolios are designed to be held for the long term. Though they will suffer at times, they are exposed to a wide range of asset classes across the world, and tend to recover.