By: Graham Wainer
Hopes for economic recovery dashed by markets’ ‘sharp and decisive’ reaction to coronavirus – Graham Wainer
The first quarter of 2020 was truly historic, marked by the emergence of a global pandemic and widespread economic shutdown.
The reaction of the market has been sharp and decisive. After such a strong 2019, equities were ‘priced for perfection’ earlier this year and assumed a gradual recovery in the economic outlook, with geopolitical risks subsiding (remember the US-China trade deal and Brexit?).
As COVID-19 cases started to surge in Italy, dispelling the assumption that the virus would remain confined to China and Asia, investors attempted to ‘price in’ its impact for risk assets. Markets retreated at a blistering pace and volatility rose to levels not seen since the financial crisis of 2008. The S&P 500 index registered the 5th worst calendar quarter in 70 years, with a return of -20%, and the pace of the initial sell-off was deeper than any other in our history.
No one really knows how this will play out and while we don’t attempt to predict the future, we can set out what we do know at the point of writing.
It boils down to three main things. The first is that the economic cycle that started in the first quarter of 2009 is now over and much of the world is now in recession. The second is that financial markets have reacted in a rational way, re-pricing lower to reflect considerably reduced revenues and earnings for almost all businesses. Some industries are suffering more than others and at different paces. Those reliant on the daily footfall of consumers, such as traditional retail, travel and leisure have seen cash flows dry up. Finally, supposing treatment and vaccinations can be developed successfully, we can assume the threat from COVID-19 will pass eventually.
This outlook comes with a number of unknown variables, including uncertainty around how much lost economic growth can be recovered and how quickly economic activity can resume - itself a function of several unknowns.
We have stayed true to our discipline of avoiding ‘market timing’. Selling during a crisis can be beneficial in the short term, but often leads to adding back to risk-assets at a higher level when the outlook has improved. By carefully ‘tilting’ the portfolio to the strongest areas, we can add value along the way.
Until now, the ‘post-crisis era’ has referred to the period following the global financial crisis in 2008. Soon we will enter a ‘post-covid era’, with ramifications for businesses, governments and consumers. The investment landscape will be reset and, while it is too early to foresee this environment with any accuracy, our focus in the coming months will be on identifying appropriate investment strategies for the future.
Most importantly, we wish you all well and our thoughts are with anyone who has been directly affected by this illness.
Graham Wainer is CEO and Head of Investments at Stonehage Fleming Investment Management. He is also Chairman of the CIO Group.
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