Coronavirus Commentary 27th March 2020

Well, another week has passed which saw another few trillion thrown at the economy and the US picking up the mantle from Europe as the potential epicentre of the virus. The US, UK, ECB and Germany all released details of further economic and financial support. Budget deficits are going to be huge across a large swathe of countries as a result.
Meanwhile there is mounting evidence that much of Asia has the virus under control and that China is continuing to get back to work. This is happening just as the West is locking down so obviously exports will be impacted for the duration of such. However, it is still good to see that there is economic resurrection post the viral collapse. As we are in the early stages of lockdown it doesn’t seem like it in our daily lives at present, so another perspective is useful.
Markets continued to be very volatile but, unlike the other weeks this month, look likely to close meaningfully higher in equities and a little bit higher for government bonds. Gold also rebounded from its rapid sell off but corporate credit, particularly High Yield, is still under severe pressure. This is partly due to the fact that the sector is, by definition, economically sensitive but volatility has been further impacted by illiquidity and dysfunction in the market. Several managers are commentating that more liquid, better quality issues are being hammered as some participants are just selling what they can as opposed to targeting the most vulnerable names. This will throw up opportunities when one can get comfortable with underlying credit quality. We are doing lots of work on the sector but have not stepped up to the plate just yet.
We have spoken to several UK Equity managers this week and they are all commenting on how quickly UK companies have switched to cash conservation mode with many dividends being scrapped for the time being. Non essential spending has also been brought to a halt. The US has seen unemployment claims jump from c300,000 to c3,000,000 as consumer facing businesses temporarily cease trading.
Investors are trying to cope simultaneously with this sudden stop in the economy, the evidence that China is already picking up and the sheer scale of the stimulus that authorities have thrown at the issue.
It is quite likely markets will bounce around for a while as each piece of good and bad news is extrapolated in a febrile environment. We then need to get back towards normal volatility with daily moves of 1% or less and not the recent huge gyrations.
However, economic activity will resume and consumer facing businesses will need to re-hire staff. As mentioned in prior communiques, this is likely to be a severe but one off hit. Therefore it is likely that as soon as some sense of normality can be seen on the horizon, investors will look to value companies on what they consider ‘normalised’ profits to be rather than the near term outlook. It will still be incumbent on investors to seek survivors and that is why we will continue to concentrate on managers who focus on balance sheets and cash flow.
We did no trades last week after the high activity of the prior two weeks.
It is difficult to be dispassionate in such times but when I assess the situation I see Asia panning out as expected and infer from that that the West will follow a similar, if not identical, path back to normality. It is trying to maintain that perspective whilst in confinement and listening to a torrent of Covid-19 news that is the challenge. However, with many managers seeing some of the best bargains of their careers out there, it is not a time to be dwelling on the very short term but on long term opportunities.
I hope you enjoy the weekend – even if at the moment they are not as different from weekdays as they used to be!
Yours sincerely
Ian Brady
Chief Investment Officer
27th March 2020

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