Coronavirus War
Coronavirus has certainly focused the mind on what is and isn’t important – a personal lifestyle re-set button if you like. For many of you with more pressing things to worry about than money, the only message that you’ll want to hear from KMD at this time is that – financially speaking – things will be alright in the long run. We would like to reassure you that we firmly believe this to be the case. Centuries of financial history show that stock markets always bounce back – even if they have to ‘climb a wall of worry’ to do so. It’s always a matter of time – we just can’t tell you how much time.
So, although we envisage further headline-grabbing panic, market volatility, business casualties and economic uncertainty before this devastating Coronavirus has run its course, we are also convinced that the scientific principles we have applied when crafting investment portfolios mean that they are well-positioned to deliver over the longer term.
A deeper dive
For those with a deeper interest in what is going on in the global economy and financial markets at present, we hope that you will find the rest of this update interesting and informative. In it, we will explore some of the recent financial developments that have been discussed at KMD Investment Committee meetings. These discussions have formed the backdrop to our decision to partially rebalance KMD investment portfolios out of cash and into equities.
A ‘can do’ spirit is emerging
Around the globe, countries are at war with an invisible enemy. Until this week, the Olympic Games had never been rescheduled for anything other than world wars. But isn’t it amazing what we can achieve together in times of crisis? The London ExCeL exhibition centre will be transformed into a fully-staffed 4,000 bed critical care hospital in just a matter of 14 days. The engineering geniuses behind Rolls Royce and Formula One are redeploying their considerable talents to the production of desperately-needed ventilation equipment. Over half a million UK citizens have answered the call to volunteer to help the NHS and support community outreach efforts. Even while observing self-isolation, we can all pull together.
‘Whatever it takes’
In terms of the global effort to mitigate the economic effects of the disease, we are seeing similar Herculean efforts in the form of unprecedented economic interventions by Central Banks and Governments.
Pretty much every Central Bank in the world is currently biased towards lowering interest rates or printing money to inject further liquidity into the system and head off economic crisis. The US Federal Reserve, European Central Bank and Bank of England (amongst others) have made a concerted effort to reduce benchmark interest rates to near zero (currently 0.1% for BofE).
Much of the extra money has already been earmarked by Governments for Coronavirus rescue packages, with the global mantra being one of: ‘we’ll spend whatever it takes to beat this.’ On March 20th, Rishi Sunak announced a UK financial support package of £350 billion. On the same day, the EU suspended its strict rules on public deficits to allow Governments to ‘inject spending into the economy as needed’ and on March 24th, the US senate agreed a $2trn (£1.69trn) rescue package to combat the effects of Coronavirus on the US economy. To put this government largesse into perspective, it’s worth noting that the UN’s trade and development agency says the slowdown in the global economy caused by the Coronavirus outbreak is likely to cost around $1 trillion.
Short term results
In the short term, the results of these interventions on stock market sentiments have been positive. The introduction of a ‘safety net’ of fiscal support for businesses has led to some of the highest one-day gains ever seen. The Dow Jones registered an 11% rise on the news. But it’s early days. Until a reliable vaccine is found, we seem to be looking at ‘World PLC shutdown’ and we can’t foresee its duration or fall-out.In the words of the original ‘intelligent investor’, Benjamin Graham: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” In other words, when emotion dies down and uncertainty ends, rationality takes over, stock markets find their equilibrium and investment ‘normality’ returns.
Is anything certain?
What we can be certain of is that bank base interest rates will be low for a very long time – which continues to be positive for borrowers/debtors and bad news for savers. It means that – in order to grow their money and shield it against a potential inflationary future environment – investors are forced to buy riskier assets such as equities and corporate bonds.
The risks of currency devaluation are high – especially for those economies that go even further than zero interest rates in their attempts to galvanize economic activity and end recession. Here we have in mind the prospect of ‘helicopter money’ – a term which describes a wide range of (as yet untried and untested) unconventional fiscal policies – including the concept of central banks making payments direct to individuals.
Currency devaluations could be good news for gold investors – given that the commodity has an intrinsic value based on its own rarity and market demand. If an individual currency devalues, it will require more of it to acquire each ounce of gold, therefore gold is a defensive asset for those already in it when a currency devalues.
The other great uncertainty is human nature. How long can we bear to remain on shut-down and self-isolate? How long before people become convinced by the argument that a fall in global GDP could cost more lives in the long run than letting the virus run its course? How long before individual nations question whether they are better off looking after their own interests than keeping in step with the rest of the world? President Trump has already signalled that he wants Americans back at work after Easter and has allegedly tried to poach German scientists working on a potential Coronavirus vaccine.
How to respond?
With regards to gold and mining stocks, we believe that these have under-performed recently because of strong selling pressure as institutions have needed to find liquidity quickly to meet trade positions.
With regards to the under-performance of the Value investment strategy compared with Growth, we believe that this was a result of investor herding into perceived quality stocks prior to the crash. People were prepared to pay extremely high prices for companies that were thought to be invincible. It is our belief that in the next phase of stock market development, share valuations will be analysed more closely relative to the earnings potential of the issuing company.
With regards to the US, we acknowledge that the dollar is maintaining its position as a safe haven currency – as is the Japanese Yen – and therefore we seek diversified currency exposure in portfolios. Having said that, we are rather more cautious about the prospects of the Euro when the dust settles and countries like Italy get another chance to reappraise the benefits of EU membership.
Buy when looking into the abyss
In our first ‘Coronavirus update’, we argued that extreme stock market falls were the worst time to panic sell. Logically, therefore, the correct response on behalf of clients with greater risk appetites is to buy.
At the most recent Investment Committee meeting, we agreed that – where client risk profiles permitted – it made sense to use a proportion of cash to increase exposure to equities at the newly reduced prices. This will likely be the first in a series of strategic rebalances in favour of equities. In doing this, we are not trying to time markets or to call the bottom of this particular cycle. Rather, we remain committed long-term investors with a belief that equities as an asset class will continue to be the best way of maintaining and building future – inflation-proof – wealth.
It is believed that the original quote about contrarian investing attributed to Baron Rothschild, of the famous banking family, was “Buy when there’s blood in the streets, even if the blood is your own.” In the aftermath of the panic following Napoleon’s defeat at the Battle of Waterloo against Wellington, he made a fortune buying assets while everyone else panicked.
The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.
Dean Aitchison
BSc (Hons), IMC, MCSI, MIMA
Chartered Wealth Manager
Investment Manager
March 2020
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