Markets and Outlook April 2020

I expect that most clients are fed up with hearing about the Coronavirus news and its sad consequences. I admit myself to limiting my news intake on the subject to the 5pm briefings, so as to not get too depressed. Nevertheless, it has to be highly important for investors and advisors to try to form views on what is happening and, more importantly, what will happen.

The picture is particularly foggy as there is so much we do not know about this new virus. We are uncertain if it will diminish in warmer weather, if people infected retain any lasting immunity, how long a lockdown is required or whether there will be a second or even subsequent waves.

We can, however, say that although the first quarter of 2020 had only a few weeks of virus impact and only 2 weeks of UK lockdown, GDP in most Western economies will have shrunk from an expected circa 2% growth to a 3-5% decline. The outlook for the second quarter is clearly much more severe as more of the period will be affected. We could see 15-20% declines or worse.

Governments are struggling to balance the safety of as many people as possible with the negative implications on the economy. There is no easy solution and criticisms of attempts to do the best in extreme cirumstances seem inappropriate at this juncture.

So far, we have broadly seen unprecedented financial moves to stabilise employment by putting state money in people’s pockets that their employers could not afford to do with little or no sales. Afterwards, people will still feel poorer and many will have lost jobs, so demand will need boosting and we will need another type of measure, as was the case in the 1930s.

It seems that the most sensible initial stimulus should come from increased construction and infrastructure spending by Government. This was already a part of the Government ‘Levelling Up’ strategy and is even more needed now. The benefits here are that it pays many in a labour intensive industry, requires very limited imports and leaves a useful asset at the end of the day. Much better than consumer spending on BMWs and foreign holidays. You may have already seen signs of this trend when two weeks ago the Government quietly announced contractors could start work again on HS2 and more recently, housebuilders began to reopn sites with new social distancing measures.

Companies such as Bellway, Balfour Beattie, and Severfield should likely benefit over time.

There are also important structural changes taking place in society. Most pandemics, and there have been more than one might think, last about 18 months minimum unless a vaccine is found sooner. In that time they produce innovation, change and adoption of trends that were already available. So one finds some existing trends being accelerated. Working from home is a very good example. It was already acceptable for some to work 4 days in an office and one at home. Now many companies are questioning if they need such large offices – a clear impact on certain property companies. People have got to grips with technology that was already there, such as zoom video; not just for conferencing, but for grandparents to see and talk to  grandchildren. Film releases are missing out the cinema chains and finding other media channels to use. All this will mean less transport and new forms of delivery. Online shopping has probably jumped 5 years on as a result of the virus, with more bad news for the High Street. Then there is the sharp fall in oil prices. A benefit to many industries and consumers, but the move to a greener fuel market will continue, if people have valued cleaner air to breath.

The one really negative message for clients is that the majority of companies are cutting or delaying or passing their dividends in an attempt to conserve cash in an uncertain world. Clients with a high income requirement will have to sit this out, albeit with some careful attention to which equities will still be making payments. As a guide, for 12 months from 1^st March 2020, I would say that income from equities is unlikely to exceed 30% of the previous 12 months. In the following year it may approach 60% of the former. Not till 2022 will be see anything like the recent past and dividend payout ratios may be rising too. If it is any comfort, most responsible Company management teams are taking 20-90% salary cuts and refusing bonuses just to prove that we all in the same boat together.

Barrie Newton