COVID-19 Commentary, November 2020

Harpsden Wealth Management Limited November 2020 Covid-19 Update

In light of the decision by the UK government to follow the path made earlier in the week by several European counterparts and order a “lockdown light” I am writing to update you on our thoughts and positioning. The US Election this coming Tuesday could obviously turn out to be just as momentous but we will deal with one major development at a time!

We continue to be slightly overweight equities (looking to be more so but have been awaiting a more attractive entry point to add following the big Q2 rally in financial assets). Likewise, we have continued with our preference for the UK and Asia within equities and have maintained an underweight to the US whilst having de minimis exposure to both Property and Government Bonds.

Nothing that has happened in the last week changes our views.

Whilst obviously short-term economic activity will be negatively impacted by further curtailments and restrictions, there are several very important differences between now and March. Firstly, investors have received the message loud and clear that both Central Banks and Governments have not only got their backs but are also going to provide unprecedented support to the real economy. This wasn’t clear at the outset of the pandemic but as it became apparent, especially after the US Federal Reserve pumped liquidity into the system, markets stabilised and began to recover. The UK furlough scheme has been extended (on the very day it was due to expire), the ECB last week strongly hinted at further stimulus in December while further US stimulus will be enacted post the election. Secondly, there has been a warp speed improvement in medical provision since then in terms of capacity, treatments and work towards the development and production of vaccines. Thirdly, we have already seen that economies recover rapidly once restrictions are eased. This is true across Asia, the Americas and Europe. Fourthly, public companies have raised record amounts of capital (both debt and equity) over the last six months and so most companies are now better placed to get through the crises and be able to take advantage of the opportunities once we reach the other side.

So, investors now have a precedent – they didn’t in March.

As a result, more liquidity, more stimulus and therefore more government debt lie ahead and all of which will outlast the pandemic. As mentioned above the measures are intended to alleviate and allow recovery from the short-term disruption that will occur – they cannot prevent the slowdown. So, the impact on financial markets will be dependent, as it usually is short-term, primarily by sentiment (as Benjamin Graham noted, “in the short run, the market is a voting machine but in the long run, it is a weighing machine”). Orthodox financial theory tells us that we should value a share on the sum of all its future cash flows, applying an appropriate discount rate. This means that even a relatively severe short-term hit to profitability shouldn’t have a big impact on the ultimate value of the share, assuming a recovery does ensue. However, in reality, investor emotion often results in disproportionate sell-offs, which whilst throwing up opportunity, are painful to bear in the interim.

Harpsden Wealth Management Limited November 2020 Covid-19 Update

On the other hand, if investors remain optimistic they can “look through” the short-term pain and therefore shares can maintain their value in the face of short-term profit deterioration.

Which way it bores this time round is impossible to tell although the reaction last week to European lockdowns was relatively muted.

It is also very interesting that more economically sensitive and Covid affected stocks saw their rally peak on or around June 9th despite major indices not peaking until much later. This date is important as it is when infection rates in the Southern States of the US began to rise, fuelling fears of a second wave.

Another point to note is that Government Bonds have not provided an offset to recent equity softness, indeed US bond yields have actually risen of late.

So, in conclusion there is plenty to worry about in the very short term, be it the second wave of the virus in the Northern Hemisphere, a potentially destabilising reaction to the US election or of course a no deal Brexit.

However, markets and companies have been dealing with these issues for a while now and they are not the Black Swans they were when they first appeared. As importantly, the authorities are on the case and it is likely that we will see some medical breakthrough by the Spring. Lastly, we already have concrete evidence (no pun on the infrastructure boom intended) ephemerally in the UK and Europe, but more long lasting in Northern Asia, that once economies reopen recoveries ensue quickly and at a rapid pace.

With this in mind we stand ready to put the cash we have retained into the markets and participate fully in what we see as the inevitable recovery of economic activity, profit growth and dividend payouts.

Best Regards,

Ian Brady

Chief Investment Officer

2nd November 2020

Copyright © Harpsden Wealth Management Limited 2020 (unless otherwise indicated). All rights reserved.

Harpsden Wealth Management Limited November 2020 Covid-19 Update

Portfolio changes since the 3rd April 2020 – RJIS

Current Asset Allocation

Important Information/Risk Factors:

Past performance is not a guide to future performance and investment markets and conditions can change rapidly. Investments in equity markets will be more volatile than an investment in cash or fixed deposits. The value of your investment may go down as well as up. There is no guarantee you will get back the amount invested. If your fund invests in overseas markets, currents movements may affect both the income received and the capital value of your investment. If it invests in the shares of small companies, in emerging markets, or in a single country or sector, it may be less liquid and more volatile than a broadly diversified fund investing in developed equity markets.

The views expressed herein should not be relied upon when making investment decisions. The article is not intended as individual advice and if you require advice or further

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