As lockdown gets extended, we continue to talk to investment professionals with the aim of sharing thoughts from the front line. We are writing up the fund manager meeting notes and hope to have those on the website by the end of month.
Franklin (CIO Insight Series)
Is this the same as the Great Depression?
- Governments knew that mass social distancing (lockdowns) would cause massive economic problems and therefore they have been quick to enact fiscal and monetary policies
- The great depression era lasted 10 years and it was five years before fiscal stimulus was put in place. In the US this was 2 weeks and bigger than anything we have ever seen
- In the late 1920s/early 1930s unemployment was 25% for four years. Although unemployment could reach 30% in the US, 80% of the jobless claims are temporary layoffs, this means employers are expecting to take these staff back on
- In the US where a firm is working on 20% capacity and it returns to 65%, that is a massive increase in activity and not the same as the great depression
Is this worse than the financial crisis of 2008?
- The financial crisis was about banks and the risk they had taken on, there was also significant complex leverage which took time to unravel
- This is different because the economy has effectively stopped, businesses are not making money and the key is how the government restarts those businesses
- Households are also not leveraged in the same way as they were in the financial crisis
- The response of governments and central banks has been faster and greater than anything we have ever seen
What are the risks?
- If the lockdowns last longer than expected, do the temporary layoffs become permanent?
- 30% of US employment is in retail trade and travel, and how do you revive this sector?
- Germany and Denmark are looking to open kindergartens and younger age schools with the aim to get people back to work. There needs to be more clarity on how other countries come out of lockdowns
- They believe the shape of the recovery will be different to that of the global financial crisis and great depression
- They are concerned about the longer-term consequences of all the fiscal and monetary action – stagflation or inflation, interest rates, lower growth, taxation?
- They think in 2021 we could get back to global growth figures at the same level as before the crisis
Jupiter (Economic Team)
Things to consider:
- We shouldn’t take the reports from OBR and the IMF in their literal sense, they paint a very bleak picture and why many assume we are heading into a depression like 1929. These are worst case scenarios
- Russia and Saudi Arabia have agreed a compromise on oil, which is positive news
- Three weeks ago, over 50% of Americans approved of Trump’s handling of the crisis; this has now dropped significantly which could impact the results of the election
What to watch:
- Exit strategies are complicated and the focus for some will be schools. If children go back, you free up working parents who can then return to work
- One route to exiting lockdowns is to adopt a monitoring system, as used in China where people’s data and movements are stored. The problem is that this uses 5g technology, and China are at the forefront of this development
- Focus should be in global unemployment, the figures in the US could rise to 30% unemployment, and whether they go back to work when lockdowns are lifted. In the UK, unemployment remains relatively low due to the schemes in place to protect jobs
- The UK Treasury is struggling with cash flow because normal revenue is not coming in – compared to 12 months ago, air traffic is down 92%, train travel is down 95% and road travel down 71% all of which are big revenue generators
Where to be cautious:
- Market rallies: these are common in bear markets and a lot of bad news is being ignored by them currently
BlackRock (Larry Fink and Philipp Hildebrand)
Some thoughts from the Chairman and Vice Chairman of BlackRock.
Changing lifestyles and impacts:
- This will have a lasting impact on the world when this is over, and behind us. The exercise that people can work from home has substantial positive sustainability outcomes. If there is a move to more people working from home which they expect, this could be extremely positive for the environment around us
- During this period sustainable investments have proved more resilient, and they expect greater demand and acceleration towards this within portfolios, as a direct result of COVID19
- This could have a dramatic impact on commercial real estate demand, especially areas like office space if there is a move to working from home
- They believe that psychological issues will be a long-lasting impact of this exercise
Concerns and uncertainty:
- Markets are pricing in a poor quarter 2, and a recovery in the third quarter. They don’t necessarily believe in a V-shape recovery because there are too many variables. In China although there is a return, the service sector is not recovering. The high street is part of the economy, how will this come back, and is enough being done. Can small and medium size businesses survive
- They are worried about the disease curve in emerging markets, as China, Europe and US comes out of this, what about other countries and how does this impact those poorer economies which do not have the ability to reboot their economy?
- World airline travel is a further concern and how this gets moving again. One solution will be testing at airports, and only if you pass do you travel
- Their biggest fear is whether this becomes a full-blown financial crisis. This might happen if the disease keeps going and lasts longer than expected. It is dependent on how successful governments are with the policies they have put in place or may put in place moving forward
- Long-term they are concerned how governments finance all this debt in 5 to 10 years’ time
T Rowe (Specialist Health Team)
- More infectious and less deadly than first thought
- More and more data showing very low mortality rates around 0.5%
- Mortality rates vary due to the level of testing; when testing is over 10% mortality is below 0.5%, where there is 1% testing the mortality rates are as high as 10%
- Until there is a vaccine there will be some form of social distancing for some time to come, wearing masks may be commonplace and testing before travelling
- Good news is the whole pharma industry is working on finding a vaccine, or a method of stopping it; there are significant resources being put into this. To put this into perspective there are over 40 companies involved in vaccines
- 12-18 months seems overly aggressive, you need trials across different groups – children, old people, pregnant women etc – before you can approve a drug
Invesco (Economic Team)
- Economic data starting to filter in:
- Car sales in the UK down over 40%
- Business sentiment has collapsed especially in the service sector
- Forecasts becoming even more unpredictable, for the UK growth is predicted anything between 1% for -10% for 2020
- Latest Merrill Lynch survey shows a majority believe a U-Shape recovery, with a V shape being 15%
- The deeper the bear market, the longer it takes to reach the previous peaks. In 2008/09 it took 50 months to get back to previous peaks, the average is 20 months
- Dividends at risk in 2019 £110 billion, expected to fall to £72 billion in 2020 but worse case scenario could be £48 billion. Do not believe commercial property can sustain the same levels of income going forward
- Any sustained rally in risk assets might be premature
JP Morgan (Economic Team)
Things to look out for:
- Want to see if the furlough scheme is working and whether this protects jobs, so looking at unemployment figures
- Clear schemes on how countries come out of the lockdown especially as 80% of the US and UK economy is service sector based, and 74% in the Eurozone
- They still think the earnings estimates are too high, and these will come down further. Watching the earnings figures coming out will be crucial on how these estimates change
- Until a vaccine is in place does opening on economies focus on the domestic side but keep borders closed, and therefore air travel may not return until 2021
Franklin (Research Team)
- E1.8 trillion is invested in cash in the Eurozone – over ten years to 31 December 2019 the return after inflation is -1.87% p.a.
- Bull markets last longer than bear markets; the average bear market lasts 3 years and 11 months with returns of +167%, the average bear market lasts 12 months and returns -31%
- Looking at investments daily shows 54% positive returns, and 46% negative returns. Over twelve months this is 72% positive and 28% negative. Over five years it is 89% positive and 11% negative
AXA (Economic Team)
- Concerns around Italy and the level of debt needed to repair the damaged economy, currently there is very limited support by the Eurozone. This is a risk to any recovery
- Markets are looking at three things – positive news on the virus, then how we come out of the lockdown and then what happens with the economy
BMO (Economic Team)
- They think we have now hit the bottom of the market, but that markets are slightly ahead of themselves
- We should expect more bad news in the near term. Not all businesses will survive, unemployment will rise
- The Eurozone remains an area of concern and they expect more stimulus in the coming weeks and months
Investec (Economic Team)
- Be careful how you read the OBR data as these are based on a very long lockdown
- They don’t believe GDP forecasts are helpful because of the different variables
- They expect interest rates to remain low for a long time, and we should expect some additional taxation
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.