As you will be hearing and already have heard the data screaming the impacts of the Great Corona Crisis (GCC). The 6.8% YoY Q1 China GDP decline, the 58% drop in auto sales and the near 70% drop in JPMs profits are very alarming but they are screams from the past. We’re still in the middle of this recession and the steps to take in order to brace for further shocks is paramount. Since we are not allowed outside and everything is online, the presentations that usually take place in London by professionals are now all online. So, I’ve been listening in to the views and advice from those at the top of managing the survival of investments in this downturn.
Tom Stevenson – Investment director, Fidelity
“Best days of the market usually follow the worst days of the market.” You must not be shied away by the sudden drop in the prices. Each year there’s usually only a handful of days that if you miss, your portfolio will have significantly less returns, if any at all. Therefore, it is important to keep your finger on the trigger as the opportunities cannot be missed.
What do you think the landscape will be coming out of this?
- More regulation, companies forced to act in a socially responsible way
- More nationalised industries.
- When governments are spending as much as they are now there’s a huge threat of inflation returning.
- Be fully invested now, don’t be more bearish as we fall a little more.
Considering amount of debt before crisis, what do you think of debt now that there’s been a lot of spending?
- Inflation definitely going to be returning. You can’t flood market with excessive cash and not risk inflation.
- Inflation never seems like a problem until it’s a big problem. It will not return for a bit but once it does it will be quick and sudden, it’s important to be prepared for this.
- The government has been executing some heavy emergency measures. It’ll be hard for government to exit from these emergency measures. Since 2008 the UK hasn’t even recovered, the interest rates haven’t even got back to 1% and now we are cutting again.
- With these heavy government support we lock our self into a zombie economy. Everything becomes dependent on it and if the government doesn’t become stricter with who gets a life jacket markets will get addicted to this support. The quality of entrepreneurship will not be the same.
Who will bounce back?
- Areas that haven’t had detrimental impacts. Especially firms that are only being affected by the wider market but aren’t directly affected and definitely not impacted in the long term.
- Airplanes will probably bounce back. Especially with the government support and the importance of travel, it’ll be back.
- Product or service sector remains undamaged and so there can be a quick recovery.
Recovery of aviation industry. Will more airlines become insolvent?
- Aviation is very dependent on high utilisation.
- Depends a lot of willingness of gov to support airlines.
- It’s important to keep an eye on who gets support and how much.
- At this point these companies are addicted to the support and will perish if they are not on the list.
Consequence of QE in the long term
- Depends on the consumer. In 2008 took time for people to regain confidence and have the economy back in full swing.
- Due to this being a health issue there can be a problem of people not going out and spending as much due to their health being at risk.
- If everyone becomes cautious it can cause problems, the levels we had in 2019 won’t be back for a while.
Negative interest rates
- BOE and Fed say that it is very reluctant and it’s very damaging.
- What we’ve seen past few weeks with bank action is the template that we expect going forward.
Anna Stupnytska – Global head of macro and strategy, Fidelity
“Every finance expert has to become an epidemiologist.”
We should definitely expect a continued contraction in Q2. Developed market contraction can be anywhere between 10 to 30% QoQ, comparable to what we saw in the great depression.
Beyond next quarter we should look mainly at the probability of subsequent wave of infections. This will decide the way the markets and the economy will move in the coming months.
Large fiscal deficits in Emerging Markets can cause high outflows due to fears that the situation is not sustainable. These economies will have massive commodity shock and demand shock as they depend on international trade. Significant stress or even default on these countries can be expected and should be a risky area to invest in.
There’s going to be a sluggish recovery not just in 2020 but though to 2021. The mistake should be made that just because developed markets go back to normal doesn’t mean everything is okay. Their supply chains are in emerging markets and thus have to wait for them to recover.
Asset allocation (12-24 Mo)
- Equity & Fixed underweight
- Cash overweight
- It is hard to decide what is a safe haven now. Yen and Japanese bonds are seen as safer option.
- Equity: EM Asia overweight, DM underweight particularly US, EU and Jap stocks.
- Credit: neutral on government, investment grade US bonds seem like a good potential but depends on fed policy (currently policy supporting, but recently announced they might support high yield, to boost fallen angels).
Advice for beginners?
A big mistake that people make is that they very easily fall for consensus views which is probably more often wrong than right. Don’t be afraid to be contrary this, people can be wrong, and you might be right. Try and not to always go with the crowd but instead have your own opinion and views.
Is the GCC going to accelerate global protectionism?
We realise that a lot is about supply chains, now it’s about food security, medical supplies, protective equipment, ventilators. We will most likely move towards making supply chains more resilient, onshoring product but definitely not everything. Supply chains that are not at centre of the pandemic will just be focused on being made more resilient.
What will the effects be of all the government support?
High inflation, there is a lot of excess supply and capacity in the global economy. Debt has increased and there will be a long deleveraging process in corporate and household sector and even the government sector. Likely that well get disinflation first as we come out of this.
What decides who does better?
Stronger balance sheets are doing better in this climate, not much leverage or more cash survive better. Companies that aren’t requiring aid will probably come out stronger as they won’t owe as much money. Industrials and discretionary like gaming will do better as people are using it more due to lockdowns. Sectors that facilitate working from home will do better and benefit.
Where do I invest?
Good time to get into equities longer term, it’s important to consider risk on and maybe wait for another correction for the entry point.
What problems can still remain?
Another EU crisis could be a big issue, Italy being the weakest link. Widespread solvency issues, big wave of defaults would put big pressure on the economy. Geopolitical conflicts/tensions over the supply chains can also cause problems.
What are the markets telling us?
What’s coming isn’t fully priced into the markets. It is not reflecting what’s happening due to macro impact, second order affect. Well most likely see a few dips from the months to come.