Quarterly Investment Outlook Q2 2020

Fri 17 Apr 2020

At our Investment Committee meeting in the first week of January we discussed amongst other things the heralded resolution of the trade war between the US and China, the fact that the US Federal Reserve was printing more money, and the renewed optimism that came from a stable government here in the UK. Cautious bullishness on risk assets was the tone of the meeting. Looking back at our discussion documents from that meeting, our ‘Wall of worry’ chart which details the things which we consider to be possibly obstructive to stock market gains, did not even mention Coronavirus. In other words, we have experienced a true ‘Black Swan’ event. Global stock markets fell by 20% over the first quarter (around 15% for a Sterling based investor) having lost as much as 32% by mid-March. Gold performed its role as a safe haven rising 12% in Sterling terms, whilst Gilts rose by over 6%.

Little can be written about the Coronavirus pandemic which hasn’t already been read or heard before, nor does any of that content contain any meaningful analysis or certain information. At the time of writing data remains sparse and authorities around the world are working to a playbook where each page is written as we go along. But we can reasonably assume that this pandemic will pass, and that communities, countries, economies, and markets will return to something resembling normality.

Therein lies the challenge for investment professionals: What sort of ‘normal’ will we get? Given the human cost of the crisis and the direct impact of measures taken on everyone’s lives, it seems inconceivable that there won’t be a considerable psychological impact on the way we live our lives in the future, and that is before we even consider the extraordinary measures taken by governments and central banks to alleviate the effects of the crisis on the economy. Policies adopted during the Global Financial Crisis which were previously considered extraordinary now look to be run of the mill, as more money is printed and more debt taken on. Our view is that the effects of this pandemic could be significant and long lasting.

What then of markets, and how should we react as investors? Although markets have moved extremely quickly (algorithmic trading means we must get used to extreme positions being reached at speed) they have in the main behaved rationally, interpreting the measures necessary to contain the virus as a serious shock to economic activity. Since the initial fall though they have largely been directionless with estimates for the impact on GDP and corporate earnings varying wildly. Forecasting the short-term movements of the market is difficult at any time, at present nothing would surprise us from here. However, the psychology of investing means that unless we simply want to revert to holding cash forever, the best strategy remains holding tight and waiting for a recovery. Whilst fear abounds it is tempting to try to sell risk assets with an intention to buy them back in the future at a lower price. This approach, however logical it may sound, is unlikely to be successful given that it relies upon a frightened seller becoming a reassured buyer at an even lower price when the news flow has deteriorated further.

At our April meeting the Investment Committee voted to retain our overweight positions in Gold and short term Government and Corporate debt, and no new asset class positions were initiated.

David Baker, CIO