Richard Potts, Chief Investment Officer, IM Asset Management Ltd
As the fatality rate decreases and the shock of the national lockdown is easing off, you may be wondering what the future holds. With so much uncertainty, it’s difficult to make predictions, but there are some general principles to look at to act as a guide. No two situations are the same and how the crisis and its consequences evolve will dictate what the future looks like.
Putting the last two months in context
The market falls we saw were as big as the falls in the 1930’s Great Depression. They also happened as quickly as the fall in 1987 and brought as much fear for the future as the 9/11 Twin Towers market decline.
Last week underlined those concerns with the International Monetary Fund (IMF) releasing its updated economic forecast. The forecast sees the worst decline since the 1930’s. It shows that it expects global economic growth to contract by 3% this year, with the UK seeing a 6.5% contraction. Recovery is expected in 2021 with global growth expected to be 5.8% stronger, and the UK 4.0%.
The US saw the third consecutive week of unemployment claims rise by millions. Global trade is also shrinking with volume down by almost 20% to 30% of scheduled container shipping cancelled until May.
Corporate earnings released for Q1 2020 so far, are showing the early stages of the global lockdown having a negative impact. The expectation is that Q2 will be worse.
There is no doubt that we’re in a Global Recession. Despite this, we’re seeing some markets down by only single digits, regardless of concerns about their valuations, whereas others are still down over 20%.
Dealing with the future
When the extent of the crisis first happened and markets began to decline, we took the view that this situation was different to periods of declining activity in the real economy.
Previously, a common characteristic of uncertain times is a decline of asset values. This causes a demand to be built around assets due to over investment in the previous years.
The current situation has seen demand for assets postponed as lockdown has overwhelmed the world. There will be challenges ahead, but the majority of the demand remains and will ease off over the coming months or years once lockdown is lifted.
Critical to our view, and still as important, was how the authorities responded to the economic uncertainty produced by the virus that saw markets fall over 30% in value.
We’re not out of this crisis yet, and so careful monitoring of policy moves remains vital. But recent moves in markets have so far justified our stance.
Most markets are recovering from their lows
Governments and their agents throughout the world got their financial responses to the situation right in contrast to how other crises have been allowed to gain momentum.
When governments realised the seriousness of coronavirus, most Central Banks got involved in the markets quickly to give leadership and re-establish confidence. Targeted financial measures were also put in place. These measures aim to support key areas of the economy such as small businesses and preservation of jobs across a range of industries.
Attention is now focusing on controlling the spread of the virus and when the lockdown can start to be lifted. This new phase will bring with it new challenges and, over time, we’ll see how much damage has been done to the economy. We’ll also see how much and how quickly the postponed demand in assets returns.
Policy responses during this time will be as important as they were at the beginning. Even though the causes are different than in a traditional recession the policy response needs to be the same.
Confidence in the future
We’ve seen a shock to the economy from the lockdown. However, the government has added money to the economy to help stimulate it. It will be important going forward, to continue this approach with a careful balance so that we don’t cause inflation.
The results from this should be nominal growth sitting above nominal interest rates, in the case of the UK about 2.3% currently.
We believe that the authorities will be cautious for some time. They’ll look to keep growth higher than normal to offset the potential deflationary effect from the lockdown like small businesses ceasing to trade, disruption to supply chains and lack of confidence.
Growth of all types will be at the forefront of all actions and while it’s unavoidable, there will be some mistakes, which will cause market volatility that will:
- Not be systematic
- Be easily contained and rapidly reversed.
In such circumstances we believe that austerity will be confined to history and inflationary pressures both tolerated and encouraged if only to facilitate repayment of the huge increase in government borrowing seen over the last two months
We believe it’s right to be confident about the future. There is a tremendous amount of demand built up during this enforced lockdown (just think about your own situation). Once we see this released it will build on itself through feedback loops and our own interconnectedness.
But governments are still far from done in terms of policy response. Fiscal policy, rather than monetary, hasn’t been used extensively yet. In these circumstances money is put directly in the hands of those who will spend it, this is called “helicopter money’. It can be very effective in boosting spending which will ignite the virtuous circle
Expected market outcomes in the future
1. Volatility is likely to remain high as uncertainty about what the future looks like is resolved.
2. Politics may undermine economic policies at times.
3. Central bankers will swamp the market with liquidity at any sign of a significant decline causing risk to be likely underwritten.
4. We’ve seen the low.
5. Growth policies and a tolerance for higher inflation are set to dominate.
6. Austerity policies of the past will be consigned to history.
7. Real assets will do better than nominal assets.
8. Growth will initially attract a premium but could give way to value as signs of accelerating global growth appear.
9. Infrastructure spending will see a significant boosts.
10. Policy mistakes are always possible especially if dogma intervenes.
The information and opinions expressed here are not investment advice and are subject to change. Past performance is not a guide to future returns. The price of shares and any income from them may go down as well as up and you may get back less than you invested. Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. All data is sourced by IM Asset Management Limited unless otherwise stated.
All financial and wealth management services are provided by IM Asset Management Limited which is authorised and regulated by the Financial Conduct Authority, FCA Firm Reference Number 402770 and registered in England and Wales under Company No. 05016348 Registered Office: Riverside East, 2 Millsands, Sheffield, S3 8DT Vat registration no: GB 945 758768.
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