Fiesole, in the hills above Florence, felt very empty in 1348. As Boccaccio described in The Decameron, this was because the locals had gone into self-isolation to avoid catching and passing on the plague. But his work, in which a group of ten young Fiesole women and men isolate themselves together on a country estate, and tell each other stories, was one of the starting points for the Renaissance.
The current lockdown reflects the grim realities of our own times. The global virus has now claimed more than 35,000 lives and is causing enormous social upheaval, in terms of lost jobs, isolation and uncertainty over the future. But amid these horrors, it is perhaps all the more important to recognise the few chinks of light; not least the fresh appreciation shown to NHS workers in the UK (see In The Picture, below), and to healthcare professionals more generally around the world.
As for economics and finance, the problem of the coronavirus and ensuing lockdown is giving rise to extraordinary measures that would never usually be countenanced. When the UK’s economic footing was transformed for two world wars, the changes precipitated radical changes to the economy and society of the day (among them the creation of the NHS). In such extreme scenarios, new forms of thinking can be suddenly validated.
Radical approaches were certainly in evidence last week. The UK was ushered into semi-lockdown at the start of the trading week, following many of its European peers, while Rishi Sunak, having already pledged £330 billion in stimulus, said the government would provide for 80% of the wages of the self-employed (to a certain threshold).
However, the greatest radicalism was in evidence in the US, the country that now has more confirmed cases of the virus than any other. Forecasts for US GDP in the second quarter, released last week, show quite a range of possibilities, but all make for grim reading. To give two examples, J. P. Morgan predicts a 14% contraction, while Morgan Stanley puts the number at 30%.
Yet such numbers should come as no surprise. Obvious as it may be, it is still breathtaking to read that US restaurant bookings are down 100%. Jobless numbers showed a steep rise last week, with a record 3.28 million applicants for unemployment benefit – up three million in a week. So ends a decade of jobs growth. The number of claimants was nearly five times the previous record high. Concerned by such trends, the US president initially said he saw the US reopening for business after Easter, but he rowed back on the pledge over the weekend.
“A record 3.3 million US jobless claims and plunging PMI surveys appear to offer only a foretaste of the economic downturn resulting from lockdown measures, aimed at slowing the spread of the virus,” said Mark Dowding of BlueBay, co-manager of the St. James’s Place Strategic Income fund. “[We expect growth to] effectively lower … over 2020 as a whole by as much as 5%. However, it appears that the authorities are now throwing the kitchen sink at the problem with respect to aggressive fiscal and monetary easing.”
Last week, the president’s $2 trillion stimulus package was passed through both houses of Congress, as the Economic Policy Uncertainty Index struck a record high. The package will provide direct cheques to many US citizens, as well as dramatically expanding unemployment insurance, offering hundreds of billions in loans to business, and providing extra funding for healthcare providers – and this from a Republican administration.
The Fed’s actions may have been more important still. Its balance sheet had already clocked a new record high in the second half of March, but last week the US central bank rolled out a new set of policy measures to stabilise credit markets and limit the economic contraction. Investment grade bonds rallied in response.
Some of the actions it listed are unprecedented, going well beyond what was done in 2008–09. They included support for consumers and businesses, for commercial real estate, for corporate bonds, for municipal finance, and for much else besides. No wonder the S&P 500 had such a spectacular week – its best since March 2009. The EURO STOXX 50, FTSE 100 and CSI 300 in China also saw strong rises.
But the most eye-catching of the Fed’s measures is its decision to pledge unlimited quantitative easing; the Fed has effectively underwritten all the government’s new borrowing.
“We need massive intervention by monetary authorities in credit and possibly equity markets – we need a highly active buyer of last resort,” said Richard Rooney, chief investment officer at Burgundy, co-manager of the St. James’s Place Worldwide Managed fund. “The Federal Reserve largely satisfied this condition on Monday with a huge array of facilities aimed at providing vast amounts of liquidity to the markets. They should probably be prepared to do more. The European Central Bank has also announced a large asset-purchase program.”
Pandemic on markets, too
As in society, so on markets, the pandemic (and the measures implemented as a result) are having a universal impact, with differentiation between companies sometimes lost in the fear.
“The market sell-off continues to be indiscriminate,” said Ben Leyland of J O Hambro, co-manager of the St. James’s Place Global Equity fund. “This is not like 2000 or 2008 when there was one clear sector leading the market down. As long as you avoided technology in the former, or financials in the latter, your relative performance was fine. This time, apart from energy, there is no scapegoat sector, and equally, no hiding place. Equities, bonds and gold have all fallen together… [But] even after stress-testing our companies, we see huge value in certain stocks. In recent months we had been reducing our exposure in Compass and Safran, for example, on valuation grounds, but they are now back to being top ten holdings in the portfolio.”
The indiscriminate nature of the sell-off means it is not just equity markets that are reeling at the moment; bonds have been suffering, too, not least in emerging markets (EMs). Do bond fund managers see similar opportunities?
“Coronavirus definitely has created technical challenges, with volatility unprecedented for the last 10–15 years,” said Polina Kurdyavko of BlueBay. “In terms of systemic risk, what could drive it in EMs this time around? Generally, we see two drivers: leverage and liquidity. Corporate credit has just over $200 billion of refinancing this year, and two thirds of that comes from China. Out of all countries in EMs, China is in the best position to provide emergency support. We think the areas of focus for us should remain domestic sectors, especially Chinese real estate – the key beneficiary from domestic liquidity.”
Just as the virus was first identified in China, so China may yet prove crucial to the global recovery. Already, the lockdown is soon to be lifted across most of Hubei province, with Wuhan’s lockdown due to end sometime in April. A few small signs of hope emerged even last week. Steel inventories at the largest Chinese manufacturers may have doubled, but Chinese steel demand is already bouncing back, according to CEIC figures. (China is the world’s largest steelmaker.) Chinese investors, meanwhile, are using more loans to buy stock than at any time since the bubble burst in 2015. The low oil price certainly helps China, too.
That said, total debt figures for China in 2019, which came in last week, showed it reaching a record 250% of GDP last year, meaning further stimulus options may be limited. Moreover, key data for Chinese exports is yet to be published, and is unlikely to reassure investors. There is, it seems, a long way to go yet, even in the one country that appears to be over the worst.
History doesn’t repeat itself, but it does rhyme. There is no evidence that Mark Twain really said what is often credited to him; but as investors reel from the market turmoil created by coronavirus fears, does the past provide any reassurance about what to expect next?
The table below shows the history of UK bull and bear markets over the last century. There is a clear and obvious pattern; as sure as night follows day, market falls will end market rallies at some point. They are an inherent part of investing: the risk that stock market investors take on as the price for achieving better returns. Investors have enjoyed over a decade of virtually uninterrupted progress. It was only ever a question of when, not if, markets would reset. What no one had foreseen was that it would be a global pandemic that provided the trigger.
UK equities sank 34% from a peak on 20 February. That makes it just about the fastest descent into a bear market in history.¹ The average bear market has lasted 20 months and bottomed out with a fall of around 37% – a drop that this time has occurred inside in a matter of weeks.
It’s small wonder that investors are feeling unnerved. However, while there are no guarantees, history also shows a strong correlation between the speed and depth of a bear market and how quickly the market recovers.² It’s also worth noting that bull markets last an average of seven years.
FTSE All-Share Index discrete one-year returns
Feb 2019 – Feb 2020
Feb 2018 – Feb 2019
Feb 2017 – Feb 2018
Feb 2016 – Feb 2017
Feb 2015 – Feb 2016
Source: Financial Express; data shown is for the FTSE All Share Total Return Index. Past performance is not a guide to future returns.
Of course, the humanitarian aspect of this crisis is what most concerns us all right now. But hard though it can be, investors need to avoid adding their investment strategy to their list of worries. If your portfolio was invested correctly, now is not the time to make drastic changes, and abandoning ship in these turbulent waters is very likely to do more harm than good.
Markets may have recovered some ground in recent days, but investors should expect volatility to continue in the coming weeks and months. There could be further falls as the economic impact of the virus becomes clearer. But looking beyond the immediate future, the weight of history suggests that this bear market will come to an end and that stock markets will continue their long-term advance.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
¹ ² Schroders, 24 March 2020
In The Picture
Last Thursday’s 8pm ‘Clap for Carers’ was heard in cities, towns and villages right around the UK. Over the weekend, NHS volunteer numbers rose dramatically. The chart below shows the proportion of NHS workforce numbers for the end of 2018 from the Nuffield Trust, compared to the 750,000 reported by the NHS to have volunteered in recent weeks.
The Last Word
The NHS will last as long as there are folk left with the faith to fight for it.
Anuerin Bevan, who oversaw the founding of the NHS
BlueBay, Burgundy and JO Hambro are fund managers for St. James’s Place.
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
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