Seeing some light

This week we have spoken to over 10 fund managers and investment specialists. We are starting to see light, and some underlying themes emerge, which focus on the fact that when this passes, we will potentially have a different world.

Schroders (Economic Team)

High level thoughts:

  • This is very different to any other recession; economic activity has fallen off a cliff
  • This is not the same as dot.com crash or the financial crisis – this is more like a war-time shock without a war
  • There will be a big impact on the world economy which we will likely see at the end of Q2; GDP in the US is expected to drop by 20%, and we can expect similar figures across the world
  • Physical businesses are being impacted (restaurants, tourism, automotive, retailers etc) but nonphysical businesses are thriving (retailers, education etc)

Reasons to be positive:

  • Parts of Asia are stabilising – Japan and China are examples
  • The PMI data in China saw a big decline in February and then a bounce in March
  • China shows how rapid a recovery can be; economic activity drops by 50%, it doesn’t take much to get a big bounce when people get back to work
  • When governments lift restrictions things will bounce

Things to consider:

  • Hubei is still far from normal
  • In China although coal output and congestion is returning to normal, some areas are taking longer to show recovery such as restaurants, cinemas etc
  • How accurate is the data from China; are Italy and Spain more reflective of the extent of how this virus plays out?
  • The world seems to be about 4 to 5 weeks behind China

What type of recovery could happen?

  • Currently about 70% chance of a V shape recovery; this would see perhaps negative global GDP of -3% for the year and then +7% in 2021
  • Between 25% and 30% chance of a W shape recovery and this they see as the biggest risk; the W shape assumes the world gets back to normal in the next few months. But if the virus returns in Q4 and Q1 and there are more shutdowns then the recovery is much slower
  • Up to 5% of a prolonged depression, they don’t believe this will be the case due to the efforts by central banks and governments, but if there was a collapse in the eurozone this could cause a prolonged depression

Fidelity (Economic Team)

High level thoughts:

  • We are seeing an acceleration of certain themes, and these become more embedded into society – technology being an obvious winner
  • It is becoming clearer on sectors with structural decline, and /or long-term sustainability; Oil would be an example of this
  • The need for active investment is greater today than ever before; the ability to avoid those declining sectors and the ability to actively engage with businesses as they make changes
  • There has been a massive impact on how we invest with no places to hide and therefore the question going forward is how we are compensated for the risk we are taking

Reasons to be positive:

  • Encouraged by China’s return to normality
  • Starting to see some calm within markets, and volatility coming down slightly
  • Less pressure on some currencies
  • There are fewer panic buyers, and forced sellers, in the market – now seeing more opportunistic buyers

Things to consider:

  • How robust is the calm; markets seem to be working to April for things to start to return to normal. What happens if this drags into May and beyond
  • Markets are expecting poor Q2 data, but a prolonged shut down goes into Q3 figures
  • Companies are cutting or deferring dividends to assist short term cash flow, will need to watch whether this is permanent for some companies or temporary

BMO Market Update (Economic Team)

High Level thoughts:

  • Markets tend to look through with certainty – there remains uncertainty over company earnings, with dividend cuts, but things will get back to normal
  • There is the potential for a rally as forced sellers accelerated the falls, and this has gone, being replaced by buyers – with any rally there will be setbacks

Reasons to be positive:

  • The cases in Italy are growing by about 5% a day so falling dramatically; it seems that cases are also slowing in Spain
  • The tide appears to be turning but we are not out of the woods yet
  • Policy makers have learnt from the financial crisis and have learnt to act quickly, especially targeting the working population

Things to consider:

  • 3 million filed for unemployment in the US; this is the biggest ever jump but this has come from a very low level
  • Can the unemployed be reabsorbed quickly in a world with low unemployment
  • Markets will stabilise once they start to see earnings figures especially if there is a turnaround in May for the UK and Europe, and June for the US. If this happens it could be positive for markets

What type of recovery could happen?

  • Goldman Sachs think the global economy will drop 25% in Q2; BMO think this will be closer to 40%. Goldman Sachs think it will be a v shape recovery, coming in Q3 and Q4
  • News from China would seem to support this with PMI data and satellite images
  • Risks remain if the virus cannot be contained and lockdowns come back – this will slow any potential recovery

JP Morgan (Economic Team)

New focus for the team is on economic resilience and in particular, permanent or temporary unemployment and few SME insolvencies. Data will follow in the coming weeks.

Reasons to be positive:

  • Asian infections are not re-accelerating
  • Infections are slowing in parts of Europe – Italy and Spain seem to be getting past the point of inflection
  • Becoming clearer that the losses to households and companies are being taken on by the government and these in turn are being taken on by central banks
  • Good news from US and the packages in place – the increase in unemployment benefit to $600 a week will be higher than some people earn
  • Opportunities for growth are cloud computing and clean energy

Things to consider/watch:

  • Although past the worst of it in Asia, there have been problems with returners, and people are not moving around a lot
  • There remain concerns about the US and the lack of government interference, and the assumption that previous coronaviruses don’t like heat doesn’t seem to be the case with this, as Florida is one of the worst areas
  • They have changed their assumptions for the US with negative growth of -5.3% (previous -1.8%) in 2020, and in 2021 +4.5% (previous 2.3%)
  • They think the forward earnings expectations are too low on the S&P 500, so there may be too much optimism in the market, they think the FTSE 100 is better priced at this stage
  • No conviction on downside over the next 2 to 3 months, but more confident over the long term

Aviva (Economic Team)

Thoughts from the team:

  • Many people saw COVID19 as an Asia problem, when the markets realised it would be global, this caused panic buying even in perceived safe havens life US government bonds
  • Markets are starting to normalise as they see the scale of support from governments
  • They expect companies to be challenged, and some will fail
  • The speed of the recovery is far from certain: China and Korea are reasons to be cheerful but unemployment in the US could reach 15%
    Johnson&Johnson expect to have a trial in September for a vaccine
  • They feel this is different to 2008 where it felt scarier with bank failures; central banks have learnt from this and are much quicker to act. There are also variables which you can look to which may change things – infection rates, mortality, how much money is put into the system etc. These help them to navigate through this crisis
  • There will be clear winners, zoom is now bigger than the US airline industry! Online presence is key, flexible working and connectivity are all examples
  • Markets are inefficient in the short term but once they can see a vaccine, people navigating the challenges and it seems the world is getting on top of the epicentre things are likely to change

Round up from other updates

Invesco

Invesco see three things stopping the panic – vaccine, clear peak in daily cases and deaths outside of China and massive policy support. In terms of where we are, they think a vaccine is 12 to 18 months away, there is no clear peak outside of China and therefore the responsibility to calm markets has come from central banks and policy makers.

Current view is a best-case scenario for this year would be global growth of 2.3% and at the very worst negative growth of -3.4%.

Guinness

The difference this time is that the banking system is healthier, and the debt and the risk is effectively being taken by governments and central banks. The potential remains to enter into an inflationary environment as governments will want to inflate away the debt, as the only other option would be higher taxes which would be deflationary.

In terms of a collapse of the Eurozone and potential for that to cause a depression, they think there will be a big shift as all countries act together and help each other to avoid that scenario, especially Germany who are heavily invested into the system.

NinetyOne

They feel it is impossible to call the market but there will be an end, when that comes there will be economic growth, and at some point, in the future companies will come back to where they were before and even stronger. Periods like this provide opportunities but it is about identifying those that can survive and will thrive.

Legg Mason Royce US Smaller Team

They feel that everything was sold with reckless abandonment and indiscriminately within the US smaller cap space. This provides opportunities but the opportunity set is different. Selling out of energy, financials, some industrials and adding to tech and infrastructure names. They are not trying to guess the recovery, but they want to hold those stocks that when things get back to normal, they will make money.

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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