25 Mar 2020
Many of us are familiar with the opening line of the Charles Dickens classic, A Tale of Two Cities, with the words ‘it was the best of times, it was the worst of times’. Until recently, investors have been experiencing the best of times. The fear and uncertainty of the coronavirus pandemic (COVID-19) has rapidly changed this view, with markets erasing multiyear gains, resulting in many investors experiencing the worst of times.
We have never witnessed the speed with which the market landscape has changed, and this has meant that there are few places for investors to seek refuge. What is clear is that we are most certainly living through unprecedented times, which will be studied and reflected on for years to come.
The reaction from governments puts these events into context as they prepare for the economic fallout from the pandemic with a series of announcements, responding to the ever-changing landscape.
Reflecting on events domestically only a month into the role, Chancellor Rishi Sunak delivered a budget with £30 billion of fiscal stimulus. This became obsolete in less than a week when a further £350 billion of loans were announced. The Bank of England has also reduced interest rates from 0.75% to 0.1%, a new historical low, together with a policy to pay 80% of the salary of employees who can’t work due to the forced closure of many businesses. These are unprecedented announcements in peacetime and highlight the enormity of the situation we are facing.
In the US, the Federal Reserve has also reduced interest rates from 1.75% to 0.25%, with the recommencement of Quantitative Easing (QE), and the initial purchase of $700 billion of Treasuries and mortgage-backed securities. Previously, markets would have reacted positively to this type of news, but the impact was limited. A further announcement of QE infinity has been made, where the Fed will purchase Treasury securities and agency-backed securities in the amounts needed to support the market. In addition, the US senate has agreed to provide a relief package of more than $1.8 trillion, which has initially seen a rebound in global markets. More may be required over the course of the crisis, if the length of the shutdown is longer than currently envisaged. Again, these measures are unheard of in peacetime.
At RSMR, we are monitoring this ever-changing and fluid situation carefully, having daily discussions as a team and taking a measured approach to decision making. The strength of the research process, combining both quantitative and qualitative measures, enables us to have conviction in the managers we rate and the underlying companies they invest in; companies that have strong balance sheets that should survive this downturn. Our strength in relationships has enabled us to be in communication with many of the managers we rate to obtain their views and to understand from multiple angles how this market backdrop is evolving.
A key strength to our client portfolios is diversification in terms of geography and investment styles, as well as by asset class. Although the selloff has been indiscriminate, the recovery will not be, and the diversified exposure should assist portfolios to meet client long term objectives.
Looking forward, we are cautiously optimistic about the recovery in both China and Asia in the sense that this may give timescales that the West can work towards. This should then feed through into portfolios as these regions recover and peak infection is overcome from east to west. However, we are mindful that any evidence of resurgence in these areas will be a potential setback.
We also need to consider that any market response to policy announcements, however euphoric, may indeed be temporary and could just be another tooth in the saw-like movements of markets, while heightened volatility remains until there are signs that peak infection has been reached in the West. Our view is that there could be an optimal trade off in terms of the number of new cases versus economic impact, with the functioning of the healthcare system at the core. This approach would be in keeping with the government policy of flattening the peak and pushing the pandemic further into the summer.
Home anti-body testing kits will enable those who have had the virus and recovered to return to their day to day lives and bring the economy back to life. This could be a game changer in the short term and appears to be closer than originally envisaged. Ultimately though, a vaccination or evidence of one, is what will lead to a material change in sentiment in the market and until that has been tested, trialled and produced, we could be several months away.
As such, the start of any long-term rally will be very much dependant on the ability to relax the suppression measures currently in force (without evidence of a rise in infection) or the provision of a widely available vaccine. Until clarity is found in terms of timescales for either of these scenarios, the fear and uncertainty currently driving markets will continue.
These are truly unprecedented times, but this situation will pass, a global, economic recovery will take place and the best of times will return. However, until it does, we must continue to monitor the situation and react accordingly as this fast-moving picture unfolds.
Above all at this moment we must stay healthy and stay safe.
Stuart Ryan, Investment Research Manager, RSMR
Looking for a whole host of informative, up-to-the-minute content from the fund rating experts? Click here to head to RSMR Connected.
This information is for UK Professional Advisers only and should not be given to retail clients.The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Rayner Spencer Mills Research Limited is a limited company registered in England and Wales under Company Registration Number 5227656. Registered office: Number 20, Ryefield Business Park, Belton Road, Silsden, BD20 0EE. RSMR is a registered trademark.