It is now over seven weeks since we went into lockdown. How times have changed; we have completed over 60 fund manager interviews already this year, and each week we speak to at least ten different investment teams. Even as recently as February, to speak or listen to a fund manager would normally mean attending a lunch or breakfast event which could take 2 to 3 hours out of your day. Technology like Zoom has changed the way we communicate and the speed with which we get information.
When speaking to different people, we wonder whether there is much more that can be said that we do not already know. The truth is that there are similar themes that come up during the discussions, but also, we are still picking up new information or thoughts.
On Sunday, I sat with my family to hear Boris announce the ‘exit road map’. It is fair to say, that we felt that it was sensible, and he simply reminded everyone to use common sense. However, I was surprised by the negative feedback from this.
This week I have heard two people use the expression ‘the hammer and the dance’. A new, brilliant article explains this, but the key message is that the hammer reduces infections as close as you can to zero. The dance is when you relax lockdown and you try to keep infections below 1. (Please correct me if I have the figures wrong)
We are currently in the hammer phase, with the dance phase fast approaching. That said, the Government cannot provide a concrete road map which is Boris’s point. This is how it might look but things can and will likely change. I would recommend the article as it is a highly respected piece of research, to read click here
Here are some of the best bits from this week:
JP Morgan (Guide to the Market)
The three main discussion points were whether the stimulus could supercharge the market, the long-term risks associated with that, and whether we are still in a bull market. Below are their thoughts.
Is this a true recession?
- They agreed that this is not a proper recession. Economies are being held in suspended animation until such time as the button is pressed to allow them to re-start
- There is a possibility that this morphs into a proper recession if policies do not work. The key is watching the labour market. They expect UK unemployment to rise in the next few months, and then to drop to back to levels prior to the crisis, in the middle to end of next year. The danger is after all this stimulus, that if companies do not re-employ people then this could lead to a longer bear market. In the US they expect unemployment to drop down to around 10% in 2021 (prior to COVID19 it was around 4.4%)
- Currently they feel the policy stimulus has been effective and economies can avoid more permanent damage, but the employment data will be crucial to how this plays out
Are we in the middle of super bull market (like 1980 -2000 with the stock market crash in 1987)?
- In the short term they believe we have reached the lows of the markets and it would need a significant change in news flow to return to those lows
- However, they are nervous about the recovery and current levels, especially in the US. They believe it is pricing in a smooth transition out of lockdown. So, they think there is downside risk in the short term
- Over a ten-year time horizon, they are significantly more optimistic about equities than bonds. This is down to several factors – the stimulus has been massive, bonds especially government bonds are offering nothing, the hunt for income has changed again with equities being the only real option and there is a wall of cash which will come back into the market
- Potentially we could come out of this bear market faster than previous cycles, but may miss the early stages of the next cycle where we see a rapid recovery in economic growth, interest rates going up etc. It is also unlikely that corporates will be deleveraging whilst the cost of borrowing is so cheap
- So likely we will go back into a bull market which looks like the current bull market, so not a raging one!!!
What are the long-term implications?
- Over the next 12 months, corporate defaults may increase. Where companies might be propped up now, over the next 12 to 24 months more questions may arise on broken business models. For example, does the UK need a domestic airline that flies from London to Cornwall? etc
- There will be winners and losers across the market, and quality is likely to be where the winners come from
For all the talk of bringing supply chains back they think this will not happen, but companies will likely look for more regionally diversified supply chains
- The biggest concern is that inflation races back, and interest rates rise, but they think structural trends will keep inflation under control, for example e-commerce and reduction in demand for oil
7IM (Economic Team)
Thoughts from the team:
- They believe there are four potential recovery scenarios – V+, V, U and L
- L assumes where we are never ends, and therefore any partial recovery will not come until 2022, this is not a scenario they believe in
- If we take the 2008 crisis and project that forward, then any recovery would not be until the end of 2022
- V+, V and U recoveries look at improvements during 2021 between the start and mid-part of the year. The markets are pricing a V shape and they believe it will be more of a V/U shape recovery
- They first mentioned the hammer and the dance. The hammer to some extent is easier to do because you shut down everything, the dance is the challenge which is how to re-open
- The dance is hard, especially for children when trying to use social distancing. The message in the UK is about providing a framework and more will come out as lockdown measures ease. Interestingly economies open what is important to their people – in Italy it was cafes, Germany, car showrooms and the UK, garden centres!
- The dance is not smooth; Seoul have recently shut bars and restaurants after a flare up
- For markets to go up further from this point you need a V+ recovery and they do not see that happening
NinetyOne (Economic Team)
This update was interesting and a counterbalance to the message from First Trust last week. They referred to the article highlighted at the start as well as an article in the FT, by Yuval Noah called the ‘World after Coronavirus’. To read click here
- Pandemics fast forward history, things that would have played out over the next 5 to 10 years have been concertinaed
- All we need to focus on is the scale of testing, development, and acute antibody tests, whether re-infection is possible, convalescent plasma, therapeutics, and vaccines
- Much is made of vaccine developments in the West, but China and Japan are also involved and could easily produce a vaccine earlier
- In terms of markets they do not see much capital returns from bonds going forward and, in some cases, negative yield. This means they may offer a haven, but it will not be cost free
- Since some key investors have not gone back into the market, they think markets could test the previous lows and even breach them, but they also think equities are the only way forward
- Where they see the greatest opportunities start in China, North East Asia, Australia, and New Zealand. Areas of greatest weakness are Latin America, Middle East, Africa, South Asia, South East Asia and Central Asia
- They think the Republicans will lose not only the Presidency but also the Senate
- They do not believe in a V shape recovery because they think the damage is too deep and widespread
- They are worried about the nationalisation of businesses and individuals in the West and how that might hamper growth in the future
Thoughts on Europe:
- The EU has deep problems, and they will just get worse. If there is no tourism this will have significant impact for many economies and within three years, there will be a big crisis likely led by Italy
- They do not see Brexit being delayed and the UK position is helped by the weakness in the EU
Thoughts on China:
- China will be the scapegoat for the collapse of the US economy, but the fact is that Trump ignored the danger and the economy collapsed and he needs to deflect this. He is playing a dangerous game
- China will take over from the US as the global superpower in the next five years
- The US is reliant on China for medical supplies; 90% of antibiotics come from China and 80% of the global supply of PPE comes from China
- China will drive the recovery with other parts of Asia, and global GDP
Investec (Economic Team)
Is this the same as the Great Depression?
- There are similarities to the Great Depression – stock market volatility with some of the biggest falls. The drop in US GDP is similar as are the current levels of unemployment but this time is fundamentally different
- What caused the Great Depression was a series of profound policy errors and markets never fully recovered until the 1950s. The policy in the US was to leave it alone and this allowed mass unemployment, homelessness, equities and banks to collapse and businesses failed
- Lessons have been learnt from this and within days, US interest rates were cut and trillions of USD were fed into the system with the aim to protect banks and jobs. Some people are earning more on benefits than when they were working. Banks are also offering mortgage payment holidays. These measures are about protecting economies and individuals
- Reference was made to a report where Ben Bernanke said “this is a very different animal from the great depression, which was largely man-made, and the current situation is closer to a snowstorm or natural disaster” – to read click here
One additional point: as markets are forward pricing machines and they are looking to the recovery they might be too optimistic; they might be too pessimistic. But it is worth remembering that some of the biggest recoveries come even before the peak of even worst economic data; 2009 is a good example. The S&P was up 50% by August and yet unemployment did not peak until perhaps a month or so after.
Matthews Asia (China Team)
What is happening in China today?
- Number of cases have trended down, 104 hospitalized on 12 May, down from 58,106 on the 17 February
Recovery rate is now 94%
- Clearly measures like isolation, social distancing, masks, track and trace are working
- The figures per 100,000 are not that different to countries like Singapore, Japan, and South Korea
- Key macro data is showing there is a Cap-Ex recovery both in state owned and private companies, there has been a V shape recovery in auto sales, and a similar pattern in real estate
Can we believe the figures from China (comment from Matthews Asia)?
- Did local officials in Wuhan and Hubei Province cover up initial signs of an epidemic? Yes, there is compelling evidence of an initial cover-up prior to the January 20 announcement of human-to-human transmission and the January 23 Wuhan lockdown.
- On April 16, China announced that it had revised upwards the number of COVID-19 deaths in Wuhan by 50%, an increase of 1,290 fatalities. Is this evidence of a cover-up? This is a welcome sign of transparency – an effort to count deaths that were missed at the peak of the outbreak when some died outside of hospitals or where COVID testing was unavailable. New York City has just undertaken a similar recount, and revised its fatality count by 3,778, an increase of over 50%.
- Could the virus have been manufactured in a laboratory? Several peer-reviewed scientific studies concluded that the virus shows no signs of having been man-made or manipulated by humans.
- Could the virus have occurred naturally, but escaped accidentally from a lab that was studying it in Wuhan? We are not aware of any senior U.S. official stating on-the-record that there is evidence to support this claim. On April 21, the President’s National Security Adviser said, “We don’t know where the virus came from, that burden is on the Chinese.”
- Did U.S. diplomats visit the Wuhan lab in 2018 and express concerns about safety? They apparently reported “a serious shortage of appropriately trained technicians and investigators needed to safely operate” the lab, but we are not aware of evidence of accidents there.
What are the risks to China?
- Risk 1 – that the virus returns. The economy has been open for six weeks and so far, there is no evidence of this
- Risk 2 – whether small, private firms survive. There have been some bankruptcies and unemployment but no civil unrest, so it remains a worry but not a concern yet
What about the US and China?
- Only about 2% of Americans invest in China. If Alibaba were de-listed, they would likely go and list on the London stock market
- There is a lot of talk of companies leaving China, but they are not seeing that (look at the number of US companies who operate in China, Tesla has just built a factory)
- China is a domestic demand driven story; net exports only accounted 0.8% of nominal GDP. They believe this is missed by many
The Case for Technology
This was a discussion with T Rowe on their Technology Fund, and it was worth sharing some stats to demonstrate how tech is impacting our lives today and going forward:
- Zoom has seen daily meetings go from 10 million in December to 300 million in April. WebEx handled 4 million meetings in one day alone and Microsoft saw 44 million users in April
- YouTube saw news views increase by 75% year on year
- Facebook saw total messaging increase by 50%
- Amazon has hired an extra 100,000 people, employing 840,000 worldwide and delivering more than 10 billion items worldwide a year
Virtual dating app hinge saw a 30% increase in messaging in March, and Tinder saw the length of user conversations increase by 30%
The point that T Rowe made is that technology is touching more and more parts of the economy both in our personal and business lives. These were growing trends already but have been accelerated because of the Virus. One noteworthy statistic was that software made 0% of US GDP in 1959, today it makes up just 2%, therefore there are still plenty of growth opportunities within technology today.
The S&P 500 is moderately attractive to fairly priced – so there is potential for upside – the reasons for this are:
- They do not believe the index is pricing in a V shape recovery, they think this because of the V shape recovery in stock prices, which is different
- Expectations are very low with a view that the economy will run below capacity for at least a year
- Other factors to consider are that investor expectations are at all-time lows; there is a wall of cash waiting to go into the markets, gold has been the haven and only ‘safe’ sectors have rallied
- Importantly interest rates are not going up any time soon, they will be low for longer, and the level of stimulus is twice that of everything done since the 2008 crisis
- 78% of layoffs are temporary, compared to the history the average is normally around 15%. Recovery tends to be quicker the higher level of temporary unemployed
- The unemployed are receiving a significant financial uplift from benefits, this could create pent up demand if / when they return to work
- It would not take much positive news flow to move equity prices higher
Jupiter (Economic Team)
- This is looming and so far, not much progress has been made, the main sticking points are European Courts and Fishing Rights
- Boris has said we will still leave on 31 December, but has COVID19 changed things because of the pressure on the UK economy?
- There may still be a chance we leave with no deal and end up with WTO for two reasons. Firstly next year starts a new round of EU budgets and we could be sucked into this, with no means of influencing what we pay and clearly we will not want to do that, and secondly we are down the road with a trade deal between the UK and US
- If we end up with no deal, there will be a hit to sterling with a short-term economic impact, but it will mean avoiding being sucked into a bigger mess if we extend
One additional area of caution is that over 50% of the UK population is now supported by the state and this is not a good place to be. All of this must be paid for and taxation is the most likely instrument, and this will be aimed at those individuals and corporations who can afford to pay (how very socialist!)
Jupiter (Value Team)
We have heard a great deal about whether value remains, these are some thoughts form the Jupiter Value Team:
- They believe under every academic study that value outperforms over the long term, but it has not worked over the last five years
- The gap between the cheapest companies and the most expensive is significantly higher than the peak of the dot.com bubble
- History shows that even in periods like this, the returns in subsequent periods have significantly outperformed the broader market
- They do not believe that the level of disruption in the market is any higher than in other periods over the last 95 years. Consider air travel, outsourcing etc and how they have disrupted sectors. The change today is the smart phone, and that might accelerate things but not at the level people suggest
- One argument is that things have changed because of monopolies destroying smaller companies. But, if you cut out the big companies and tech sectors, value has still underperformed and this is all down to valuation and dispersion between the cheapest and most expensive companies and not the growth of the big companies and tech sector
- They expect interest rates and inflation to increase which will benefit value stocks moving forward
Vanguard (Economic Team)
Two points of interest – the first one covered tracking and trace. Germany, Japan, China, South Korea, and Taiwan are ahead on this. Recent developments from Roche are a positive step towards ending lockdown in the UK.
People are concerned about being tracked, but both Google and Apple already track activity. The data produced by them and worth looking at is Apple’s mobility index and Google’s community mobility index.
The second picks up on a point which others have made, whether this is a one-off shock and therefore a short bear cycle. It is worth considering the following:
- Between the late 1940’s and late 1960’s, the first bull market lasted 15.1 years and returned 914.1%, the bear market was 0.5% and was down -22.2%, the second bull market lasted 6.4 years and returned 142.2%
- Between the late 1970s and the end of the 1990s, the first bull market lasted 12.9 years and returned 830.4%, the bear market was 0.2 years and was down -29.5%, the second bull market lasted 12.8 years and returned 816.50%
- The bull market which has just finished lasted 10.8 years and returned 451.3%
The point Vanguard made is that bear markets tend to be shorter than bull markets, and bull markets tend to offer significant upside for investors. The point which some others have highlighted is whether we will have a similar trajectory to previous short bear markets.
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.