Keeping communications open

Thoughts from the frontline

Invesco (Economic Team)

They believe the three things to watch from countries are:

  • Healthcare response, and how quickly it can be contained
  • Monetary response
  • Fiscal response

China is the model to follow, and if you can get this right you have the potential to avoid a prolonged slowdown.

Invesco do not believe there will be a prolonged slump, but in addition to actions the area to watch is the US.

In particular:

  • The US consumer: 40% have less than $1,000 in savings and if they lose their jobs this puts the economy at risk if they are not able to spend
  • Policy decisions will dictate scenarios and Trump is providing poor leadership

Where Invesco see potential opportunities are:

  • China and Asia Emerging Markets
  • Technology
  • High quality companies in the US and Europe

Hermes (Asia Team)

Observations from Hermes:

  • China is the model to follow in containing the virus, the rest of the world has so far been less successful
  • They believe this to be a temporary event – areas to watch are the speed of the availability of a vaccine, whether this dies down in the Summer and government actions
  • Economic activity will not be depressed forever and will come back to where it was before
  • When markets fall, it is a probably a buying opportunity, but some companies will suffer and not bounce back

Matthews (China Small Companies Team)

Matthews explained that China makes up a third of global economic output – only a few weeks ago China made up 99% of Coronavirus cases, this is now 37%.

Observations:

  • The situation in China has improved dramatically showing that with the right measures the rest of the world can beat this
  • The recovery rate in China is 87% but if you take out Hubei this rises to 98%. Currently, both Germany and Korea have less than 1% fatality rates. Italy and Spain are significantly higher than China
  • SARS gives an idea of what might happen, but this was contained and not global – with SARS there was a deep fall in consumer spending followed by a V-Shape Recovery

What is happening in China?

  • Life and work are returning to normal, currently about 27% below where it should be
  • Migrant workers are returning to cities
  • Optimism with consumers is back at levels before the outbreak, and consumers are positive about disposable income

What are the risks?

  • That it comes back; new cases have been imported ones
  • Small companies which make up much of the economy do not have the resources to survive

What to watch in China?

  • Whether there is a spike in cases as people return to work
  • How the government helps smaller companies
  • Whether they cut interest rates
  • If infrastructure projects are accelerated
  • Economic data over the coming quarters

Legal and General Investment Management (Economic Team)

Legal and General’s observations are:

  • Governments are shutting down economic activity to contain the spread of the virus, they believe the economic impact and recovery is somewhere between a rapid return to normalisation and a less smooth scenario. What this means is that growth in 2020 is between 0% and -4%, and in 2021 up to 5%
  • They believe there are limited actions the central banks can take; therefore, fiscal response is the key to the type of recovery. If fiscal is response is poor, then we could expect a big contraction in 2020 and very slow growth in 2021

Other useful observations

We spoke to the team from Atlantic House and they outlined the change in the volatility curve:

  • On 31 December this was 14%, this means the daily price move is expected to be +/-0.88%
  • On 16 March this moved to 80% meaning a daily price move of +/-5%

Property funds have closed; we don’t hold bricks and mortar-based funds in the portfolios. We spoke to Legal and General and the reason for the close is a new rule from the FCA, where if the valuer can’t be sure of the valuations (as in these exceptional circumstances) the funds must be closed. This means these funds are becoming increasingly high risk for investors, because there are potential reasons for suspension of dealing – cash and ability to pay out, and now valuations.

And finally, we would really recommend this article from Richard Woolnough, a star bond fund manager at M&G – “This time is different: a stay at home Flash Crash t-shaped recession” – click here

Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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