I sincerely hope that this finds everybody well as we work our way through this testing period.  At Church House, we are all well and functioning normally despite some unusual arrangements.  On the investment management side, we are used to working remotely, having our systems in place in Sherborne, London and at home.  I think we all miss the daily interaction, but are becoming adept at replacing this with conversations over the internet.

The confidence with which the year started, a new Government with a working majority and a BREXIT strategy in place (I wonder what has happened to those negotiations), all seems like a distant memory.  So much for my contention that we were past ‘peak uncertainty’.  Everything changed over the last two weeks of February, as the realisation dawned that the Coronavirus had got out of China and quite how virulent it was.

In our January report, we had suggested that it was getting harder to find value and that the relationship with underlying corporate earnings was right at the top of the range (outside recessions).  Going on to suggest that, without a marked improvement in earnings, a ‘pause to refresh’ was in order.  Well, we have the recession in short order and stock markets collapsed in a manner to rival 1987’s crash.  In particular, the third week of March saw genuine panic of a type that we haven’t seen for a while with indiscriminate selling and violent price swings (exacerbated by the wretched ETFs ‘exchange traded funds’).

I would like to add that we are not in panic mode, this is ‘what we do’.  This sort of volatility provides plenty of opportunities and we have been extremely busy.  We aim to concentrate on the underlying companies, what price are we being offered partial ownership of great businesses, and not concern ourselves with endless prognostications from pundits.  I have no desire to give false hope as to how long this might last, it could easily get worse yet, but experience has taught us the value of sticking to our principles and the discipline of good investment and risk management.

Clearly, we are heading into a sharp recession, considerable short-term damage has been done to economies around the world.  As yet, we have no clear idea how long this will last.  The good news is that central banks have acted swiftly and decisively to prevent this becoming another financial crisis, the speed with which they acted (much more quickly than during 2008/9) is commendable and on, effectively, an unlimited scale. 

After a shaky start, Governments have also rowed-in with appropriate direct measures.  I have been impressed with our new Chancellor, Rishi Sunak, who appears to have a good grasp of what is required.  Sadly, President Trump appeared to be in denial for several weeks, which will only make the American epidemic worse.  Overall, the support packages from governments worldwide really are on an unprecedented (much overworked word at the moment) scale.  This will require government borrowing on an equally grand scale but, for the moment, it is the correct thing to do.

I have nothing sensible to add about COVID-19 itself, we are being treated to many experts.  My observation would be that the spread of viruses does appear to conform to a clear pattern, this is clearly a particularly nasty virus, but I would expect it to conform to this pattern too (scale dependant on how well we all behave).  Quietly, I might add that this has been a good year for seasonal influenza deaths in the UK, in the hundreds I understand, while this figure is frequently 6000 to 8000.

As I said above, we do not wish to peddle any soothing nonsense as to a recovery from this malaise (in the country and the markets), we don’t know how long this will take.  It is a time to ‘stick to our knitting’ and begin to look forward to what might change on a more permanent basis.  Many of the trends in place (like high street retailing), have been sped up by the outbreak, what happens next is the really interesting thing.  As one of Berenberg’s economists, Holger Schmieding, stated in an interesting piece this week:

“Extraordinary circumstances elicit extraordinary results.  A crisis can be the mother of invention.  We expect the corona shock to spur and spread innovations in many fields ranging from a more efficient use of labour and communications technology to increased use of 3D printing and advanced robotics, to name a few obvious candidates.  With luck, this could show up in a measurable improvement in productivity growth in a while

Important information

The above originally featured in a report for Private Clients so is for information purposes only and does not constitute advice or a personal recommendation. The value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment.  You should also be aware that past performance may not be a reliable guide to future performance.

April 2020