Positive or negative

General news media would certainly have us believe we are in for a torrid time. However, stock markets may be forecasting a different story. Remembering that stock markets try to discount news now and price stocks based on what investors believe will happen in the future, perhaps six months or a year out.

It may well be the case that this mechanism happens a lot quicker than in years gone by but the process of looking to the future and trying to predict what is going to happen continues. In March this year, stock markets were falling and predicting a rapid recession on the back of Covid -19. This has duly happened and some of the economic figures have been horrendous.

If you are still able to watch a news programme, more of the same is on the way. According to the journalists, it may even be worse the next time. Stock markets beg to differ. They are not always correct, but while the news media focus on the number of cases and economic data, the stock markets right now are predicting better times ahead, less mortality & economic recovery in some sectors.

Since March markets have risen by 20% on average. It may be that markets are up to speed with events but there are two main reasons for the rally. Intervention Firstly the absolutely enormous government interventions of reducing interest rates, re-starting quantitative easing again and the amount of direct government support being pumped into the market. There are many arguments as to whether this is right or wrong. What we do know is that it has prevented a lot of short term pain and the furlough scheme in particular kept many families in good financial shape. This in turn has held up demand and despite the initial economic retrenchment, demand has recovered well in many sectors (notably not in restaurants, hotels, transport) but many other areas.

Tech has clearly been a massive beneficiary. Some tech stocks are now at multi year highs (note, that is very much in a handful of stocks and the warning signs are there). Further cuts in interest rates and support for bond markets has pushed future interest rates lower making stocks more attractive. So there are some technicalities to the rally. The market is doing its job and looking to the future. For example, pharmaceutical stocks have seen a large re-rating. This reflects the rational expectation that much more money and urgency will go into this sector in order to find a vaccine for C19 and also as a society we have all shown a preference for health over the economy when it came to the crunch, so it is reasonable to assume there will generally be more spending in this sector going forward.

Food retailers too have performed quite well, again, the expectation being that this will continue at the expense of other retailers who do not have such well-developed internet delivery services. This downturn is entirely different to the financial disaster of 2008 when the economy was considerably over leveraged and banks and other entities holding a lot of poor performing loans which ultimately had to be written off. It is also different to the recessions of the early eighties and 90’s which were structural/political in their making. This is essentially a national emergency and warrants different responses. This time the government (unlike in the eighties but similar to 2008 but for different reasons) has assumed the debts for future generations in an attempt to keep living standards high now.

An underlying assumption being that it will ultimately be better to cushion the blow than let everything go to ruin and have to start again. Development of a vaccine continues and there is some significant progress with regard to vaccines or at least drugs which ease the symptoms as such there is a lot more hope.

The pandemic has affected everyone. Clearly not every country has been affected exactly the same, but by and large most economies have seen 10 to 15% wiped from GDP (a massive number) but this has happened to ALL or mostly all economies. There are no real winners. Therefore, we are all a bit worse off and need to start again from a lower base.

At CFM we saw little or no disruption from C19 which I am very pleased about. All of our systems worked very well remotely and we also had no problems accessing the stock market as did those of our outsourced custodians and the other London stock exchange members who we deal with frequently that specialise in retail business.

Some years back I do not think this would have been such a success. In 2001 at the time of September 11, most firms did not have disaster recovery set ups. Many firms we used moved to split locations and separated staff. In our case adopting new tech paid off. We often moan about regulation but times have moved on very well with systems and controls proven to be very effective. (Not always cheap, but effective).

 

Paul Coffin

Further Reading