CFM Quarter 2 2020 Newsletter 30 Apr 2020
Financial Markets and COVID
Welcome to our quarter two update. Clearly it has been quite a dramatic few months for everyone. Firstly, I would just like to say that I hope everyone is keeping well.
I guess we had all been wondering how long the bull market would go on, with shares generally having trended up for the last ten years since the financial crisis of 2008/9. Although of course nobody really saw the COVID crisis coming and being the cause of the markets undoing.
So between January and April we have seen the following returns (falls)
These figures do hide some quite big disparities between different sectors. For instance, shares of pharmaceutical companies and technology companies have performed quite well.
Over the last month stock markets have staged quite a significant rally.
For many of our portfolio’s performance has not been as volatile as the above numbers because of the diversification and exposure across Stocks, bonds, and infrastructure.
We now expect the economy to fall 10% in the first half of 2020. However, at present we do not think there will be a major financial crisis. Whilst markets can be wrong, they were very quick to price in the effects of the virus and are now pointing to a recovery. The response from the bank of England, US Federal Reserve and other Central Banks has been positive. $18 trillion has been pumped into economies and interest rates slashed. While the Furlough scheme in the UK is expensive it is tiding everyone over and means a lot of companies are on ice but will be able to return to what they were doing before. This is much better than many companies going bust and not being there to return to.
Before going into this, banks were in good condition and can withstand losses this time.
Technology is also being a great source of optimism. Surely if this had happened even 5 years ago but certainly 10, many more businesses would have gone under simply as it would not have been possible to go on working. Now however we all have Zoom, Microsoft Teams, cloud hosted documents and so on.
Another source of great optimism is science. Biotech and pharmaceutical companies such as our own AstraZeneca and Glaxo are leading the way and some overseas companies such as Gilead in the US or Roche. Understanding of DNA and massive computing power to crunch data will allow for a vaccine to be created far quicker than in the past.
Productivity is also being massively increased as we all save time commuting and companies who were being slow to bring in new technology are forced to do so.
We hope government will put together a package of further investment after the lock down is withdrawn. Such a scheme could bring much bigger infrastructure spending and incentives for new businesses to be set up in enterprise zones.
One effect of the virus seems to be the structural changes to technology and infrastructure are going to be implemented much quicker than would have happened and this will help contribute to a much stronger economy in the coming years.
For these reasons I do not see a massive financial crisis. During the 1929 depression in the US, great mistakes were made by governments not intervening quickly enough in the economy and getting cash to where it is needed.
When the recovery comes there will be huge pent up demand. Hopefully, government will also respond and make huge infrastructure commitments. It should also consider tax cuts for key industries and a strategic plan, so we start to make things here again. Combined with business improvements the UK should recover strongly in the years ahead.
Keep well and I look forward to speaking with you soon.