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Three months on from the outbreak of the COVID-19 crisis, and the bills are finally starting to arrive.

The figures for UK government borrowing in May, released last week, are truly shocking. The deficit hit £55bn in one month, nine times bigger than in May the previous year.

Debt as a proportion of GDP has reached 100% - in other words the amount of debt is the same size as the entire economy, something that hasn’t been experienced since 1963 when the country was still paying off debts accumulated during the Second World War.

That debt, of course, is still rising – we are far from the peak, and the UK debt to GDP ratio will likely hit at least 120% in the next two years.

Back in 2009, just after the financial crisis, two well-known economists, Carmen Reinhart and Ken Rogoff, wrote a book called ‘This Time is Different: A Panoramic View of Eight Centuries of Financial Crises’, which argued that countries with a debt to GDP ratio of over 100% grew at a lower rate than countries with better (or lower) ratios.

Some of the data which informed the opinion was subsequently found to be faulty, which undermined the conclusions. But their warnings about high debt levels probably had something to do with the commitment of many governments to ‘austerity’ which informed the last decade.

Whether their prediction comes true this time, when debt to GDP ratios are much higher than in 2009, remains to be seen. The consensus at present is that governments can do pretty much whatever they want, borrowing up to conceivably unlimited levels.

Interviewed on May 18th, Ken Rogoff said that this time (i.e. now) really was different, given this was ‘the first global recession crisis really since the Great Depression’.

While the 2008 crash affected the developed world, emerging markets escaped relatively lightly. This time every nation has been caught up in the pandemic pandemonium.

Central banks are buying government bonds in large amounts, meaning there is a buyer of last resort, and an underwriter of any new government debt issues.

Last week the Bank of England committed to buying another £100bn of government bonds until the end of this year, taking the cumulative total held by the Bank to £750bn since the quantitative easing process started in 2009.

The Bank of England was surprisingly upbeat about the UK economy, and thought that the outlook had improved since it last spoke in May. It also reduced the pace at which it buys bonds from £13bn per week to £4bn. Gilt yields rose a little as a result.

After the dramatic rebound we have seen in equity markets, with the S&P up 42% from its March lows, investors could be forgiven for saying, in the words of former Prime Minister Jim Callaghan (when the UK government was forced to borrow money from the International Money Fund), ‘Crisis? What crisis?’

As a result the US stock market is now almost as expensive as it was during the Dot Com bubble in 2000, with tech stocks leading the charge once again.

The rally has been fuelled by the huge amounts of stimulus, both fiscal and monetary, as well as those familiar acronyms, FOMO (Fear of Missing Out) and TINA (There is No Alternative – to equities as a source of return, that is).

Where the market goes from here is anyone’s guess. We had two contrasting views from US investment banks last week.

On the one hand, Citigroup argued that European stocks will be trading at the same level in 12 months’ time. Earnings will drop -50% in 2020, but rebound only 30% in 2021, leaving the market’s valuation at 22x forward earnings (and so expensive), rather than the 15x PE ratio it appears to be trading at on current analysts’ forecasts.

On the other hand, Morgan Stanley argued that the cycle is ‘more normal than appreciated’, and that the world will experience a sharp recovery.

They think the global economy will roar back to pre-pandemic levels by the fourth quarter and fuel a strong stock-market bounce into 2021. ‘We have greater confidence in our call for a V-shaped recovery, given recent upside surprises in growth data and policy action.’

At this point one can’t say much other than that – either of them could be right.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

What is fintech?

Aside from being a thriving industry worth over $4.7 trillion globally, the term ‘fintech’ refers to technology that competes with traditional methods in the delivery of financial services.

There’s a certain image that springs to mind with fintech. I suddenly find myself in a spacious penthouse office, observing a cult of tech-savvy millennials as they work round the clock to improve the way that we as consumers manage our finances.

For a long time, consumers have been forced to tolerate the complacency of the big banks when it comes to financial technology. They haven’t kept up, and now a new wave of youthful innovation threatens to erode their market share. With over 12 million fintech start-ups currently existing worldwide, could we now be in the midst of the revolution that brings an end to the reign of the banking giants?

What falls under fintech?

Fintech covers a broad spectrum of activity. Here are a few examples:

Coinbase: An online platform for buying, selling, transferring and storing digital currency.

Monzo and Revolut: As digital-only banks, these organisations have no brick and mortar branches. Their services are accessed exclusively online and through mobile apps.

Brighterion: This AI and machine-learning platform is capable of identifying anomalous financial activity in order to detect and prevent fraud.

Onfido: Useful not only in finance, Onfido’s technology verifies identities by comparing photo documentation like a passport or driving license to a selfie-style video.

Why is fintech growing?

A 2019 Mulesoft study revealed that 55% of consumers found the service they receive from their financial providers to be ‘disconnected’, reflecting the lack of tech channels being integrated into these services. Moulded by the frictionless experience found elsewhere online, our expectations are higher than ever before; we demand speed, efficiency and a polished user-experience. If Amazon can facilitate a purchase in seconds, why should it then take an hour-long face to face meeting to open a bank account?

By filling the user-experience void between what the traditional banks are offering and what the modern consumer expects, the fintech industry has experienced enormous growth in recent years. Between 2017 and 2019, for example, global adoption of fintech services almost doubled, exceeding the forecasted adoption rate by 12%.

Fintech Adoption 2015 – 2019 (EY 2019
Fintech Adoption 2015 – 2019 (EY 2019)

Why haven’t we all switched to fintech already?

Unlike traditional financial institutions, a typical fintech company doesn’t strive to be everything to everyone. They tend to find a niche and excel in it. Take ‘Acorn’ for example. This app invests users’ spare change. If a cappuccino costs £2.75, Acorn will invest the spare 25p automatically.

By filling very narrow gaps in the market and filling them well, fintechs have managed to gain ground with users looking to focus in on one particular area of their finances.

The problem here however is that having your finances scattered across multiple providers does not appeal to the masses.

According to Deloitte, 60% of consumers prefer to access services through a single platform, and whilst many digital-only banks do now offer a range of services within their platforms, as well as the option to integrate products from elsewhere, the big banks have a well-established one-stop-shop status that continues to appeal to the more apathetic consumer.

They attract those not in search of a better service but those content with how things have always been: current account, investments, savings accounts and credit - all under one roof. Not a particularly special roof but it’s one they’re familiar with and one they trust won’t cave in.

Trust itself serves as another major influencer here. With many fintechs offering one specific service, they are limited in the number of touchpoints they have with their customer. The traditional banks on the other hand, by offering a range of services, pop up time and time again throughout a customer’s life.

Brick and mortar branches also serve a purpose in forming and solidifying relationships. People crave reassurance where finances are concerned. Real people and real places help to soothe clients. By only communicating through faceless digital channels, fintechs may struggle to instil that same trust.

The big banks have the trust, so can’t they just improve their tech?

It’s not that easy. Traditional banks are burdened with antiquated processes and vast workforces accustomed to doing something in a certain way. This makes it difficult for a bank to quickly bring out a new product to meet the shifting needs of customers.

Fintech firms on the other hand are incredibly agile. The structure of these organisations is flatter; they are relatively young companies and face fewer barriers to change. This allows them to test out new ideas like AI, cloud and biometrics with greater ease.

What is the future of fintech?

Whilst customer inertia may have afforded traditional banks a firm hold on market share up to now, thanks to COVID-19 that grip might soon loosen. Physical branches and cash have become practically redundant, and it’s uncertain as to whether we will ever return to our old ways. The current situation therefore presents a real opportunity for fintechs to prosper, as  demand for digital grows and we become less tolerant of online services that don’t quite hit the mark.

However, with start-up investment and cash reserves drying up in the post-COVID-19 economy, while some fintechs might flourish, others could flop. Equally, the situation could present an opportunity for fintechs and traditional banks to team up. The latter will need help to adapt quickly in the new digital world, while the cash-strapped fintechs will be seeking collaboration opportunities in order to stay afloat.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

Our last investment webinar addressed risk tolerance from a trustee’s perspective. We assessed the shift in risk and return dynamics during Q1 of 2020 as a consequence of the COVID-19 pandemic which we went on to define as a ‘white swan’ event that had reshaped the investment landscape.

In our second webinar of the series, we will explore in greater detail the impact on cash and fixed Income as asset classes, and we will assess how returns have been significantly impaired whilst the associated risks have increased.  

Cash Management

For a decade, trustees have had to weigh the benefits of being invested in markets or sheltering in cash management solutions. Whilst we all thought interest rates were low, it was still possible to earn around 2% on a fixed term deposit in USD or GBP, which would keep up with inflation and preserve capital for the long term. For a few years now, any trustees with exposure to euros have faced the challenge of zero return on cash; all depositors are now in the same position.

Should trustees accept a return of zero?

Over the medium term, the capital erosion from fees and the reduction in purchasing power through inflation will mean some difficult decisions will need to be made.

We will look at current cash management solutions to see what rates can be achieved and will look at various options to diversify counterparty risk.

Yes, liquidity is more important than ever in volatile market conditions and when the economic outlook is increasingly uncertain. Are we back in the position of needing counterparty diversification to protect against a risk of a banking crisis? In our first webinar, we touched upon the legacy of debt at household, corporate and government level. During this webinar we will take a closer look at the health of financial institutions in the US, Europe and Asia.

Path Analysis

We will discuss four scenarios for the global economy (illustrated below) to assess the possible direction of travel for the current low interest rates, and we will look at potential paths for economic recovery with or without a vaccine.

If there is no predefined shape to the global economic recovery, it can be useful for trustees to consider the recovery (R) and vaccine (V) factors to assist in assessing the global economic path.  

Whether a trustee and their clients are bullish or bearish about the future, they should be planning for each scenario to preserve and, where possible, grow capital for future beneficiaries.  

Fixed Income  

One of the most challenging scenarios is within fixed income where we have seen some dramatic shifts in yields and credit ratings.

The second part of our webinar will look at government, corporate and high yield bonds. We will firstly discuss how the returns from sovereign debt now represent a ‘risk-free’ rate of near to zero; we will then look at how corporate debt is graded by the ratings agencies; and we will finally go on to consider the boundaries and distinctions between investment grade bonds and junk.

Whilst not wanting to overstate an old investment truism - one finds out who is wearing trunks when the tide goes out. If we have just experienced an economic tsunami in Q1, we are starting to see the waters recede and the view is revealing some corporate entities with very little to cover their modesty (some may have received government issue briefs).

One of the most remarkable features of Q2 so far has been the Fed purchasing Corporate Bond ETFs. We will be unpacking this dynamic of government interaction with markets to see what impact this could have for investors.

The pursuit of rate-hunting by trustees is becoming more perilous and requires closer analysis and a better understanding of current yields, yields to maturity, duration and the inverse relationship between bond prices and yields. In the final section of the webinar, we will be taking a closer look at these features of bond markets.

In our open mic Q&A session, we will be discussing the level of risk trustees should be willing to take for a marginal increase in returns and will consider realistic expectations for returns from cash and fixed income asset classes.

We hope you can join us for the second in our series of investment webinars, click here to register.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

The severity of the COVID-19 shock to economic growth has been more severe than that experienced in 2008.

But it has been notable that the requirement of companies for new capital has not been anything like as marked as in the financial crisis, when vastly higher amounts were needed than has been the case this time.

The UK government injected £45.5bn into the Royal Bank of Scotland alone between October 2008 and December 2009. This was on top of the £12bn that RBS had raised from shareholders in April 2008.

The other banks had huge amounts of additional capital invested into them, while a swathe of other companies, from housebuilders to real estate trusts, also underwent rights issues.

In contrast, the amounts raised this time have been fairly minuscule – thus far it’s been well under £10bn of new capital. This is arguably testament to the fact that government aid has come in a different form this time, taking on company operating costs rather than injecting capital.

Another major difference this time has been the relaxation on the rules surrounding pre-emption that were introduced in April.

Pre-emption allows existing shareholders first dibs at buying new shares, and thus preserving the relative value of their shareholding, and compensates them for dilution with nil paid rights.

In late March the Pre-emption Group, a body that comprises the Financial Reporting Council and various corporate brokerages, relaxed the rules so that pre-emption only kicked in at 20%, allowing many companies to raise the money they needed without going to all the hassle and bother (and cost, in terms of banking and underwriting fees, and documents like a prospectus) of a rights issue.

The concern was that traditional underwriters – investment banks and institutional investors – would not be able to soak up all the capacity required, or quickly enough.

Previously, under UK Company law the maximum amount of equity that could be raised in a placing was 10% - specifically to avoid dilution. In America the situation is different, and shareholders do not generally benefit from ‘pre-emption rights’.

As a result, most of the equity raised this year has been through share placings, where the company is permitted to approach new shareholders, usually institutional ones, very quickly and at low cost – although this has been criticised by some shareholder groups like ISS and Glass Lewis.

Thus Compass, the hospitality business, raised £2bn in mid-May through a placing – the biggest one yet seen this year. Informa, the media group, had raised £1bn a few weeks earlier.

Many other companies have taken advantage of the 20% facility, including Restaurant Group, Gym Group, Foxtons, DFS, Hiscox, and National Express.

Other companies, food group SSP and online retailer ASOS, have issued 19% new equity, while Hays, WH Smith, JD Wetherspoon, and Polypipe have raised 13-15%. None of these capital raises would have been permissible under the old regulations.

Selling shares in assets is an alternative to this, with Marstons getting an equity injection by pooling its brewing assets with Carlsberg. SIG plc has combined a 20% placing with an offer for subscription (where investors don’t receive the compensation of nil paid rights).

Some companies have gone down the traditional route. This week Whitbread concludes its rights issue to raise £1bn, with the existing shareholder base benefiting from pre-emption.

The rights issue process was tightened up and shortened after 2008, when the cumbersome procedure exposed the ability of hedge funds to ‘short’ stock at the Cum Rights price, and then settle their trades at the Ex Rights price.

As a result, it is now much swifter and less bureaucratic – as demonstrated in the Whitbread raise, which concluded in little over two weeks.

The verdict on the attractiveness of the opportunities presented thus far? Not obviously great, with only ASOS standing out as a compelling buying opportunity – perhaps due to its online characteristics. Some of the others may take longer to bear fruit.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

The 23rd March 2020 will enter the history books as a low point in one of the swiftest and most extreme market crashes of all time. In just over a month the S&P500 fell by an extraordinary 34% and many markets became close to dysfunctional.

It was a brave investor that bought into markets at that time. At the start of the crisis, we believed  our investment strategies were reasonably cautiously positioned with balanced weightings across a range of asset classes; however, we were in no way expecting or prepared for the extent of the COVID crash, believing Chinese reports and data indicating that the virus was being successfully contained.

Despite our relatively cautious positioning, our strategies and investment portfolios were significantly impacted by the crash, and those six weeks were undoubtedly the most challenging experienced in my 25-year investment career. We concluded it was futile to try and sell risk assets in such a severe market environment, and attempting to do so would simply lock in losses for clients. Instead, we began to build up cash positions from assets that had fared better such as bonds, gilts and gold in preparation for the rally that we believed would come.

We began buying equities on the 18th and 19th March in our strategies and then on the 24th March we added significantly within PRISM. Since then, markets have staged an impressive recovery with the S&P500 gaining 35% — albeit still some 11% below its high.

I am pleased to report that our strategies and investment portfolios have also rebounded strongly with a balanced strategy gaining some 7-8% since the quarter end. There is still some way to go to get back to positive territory in 2020, of course, but the one year rolling position is now close to positive, which is an impressive turn around.

COVID-19 Progress

The recovery has been driven by the dramatic improvement that most countries have seen in limiting the progression of the virus. As illustrated below, our analysis of COVID-19 mortality progression indicates that the curve has not just been flattened; it has collapsed.

The chart shows the pace of new deaths per million of population against the total number of deaths using a log scale. This provides perhaps the clearest way to view the data and compare countries, with exponential growth reflected as a straight 45-degree line.

The initial roll over in mortality rates that we observed a month ago has accelerated rapidly. The log scale masks the scale of the movement somewhat. France, Germany and Spain are now showing mortality rates below 1 per million of population with all countries monitored below 4 deaths per million. This is an extraordinary 10-fold plus reduction in the mortality rate.

A similar picture is observed when we look at new infection rates. We are calculating and monitoring our own estimate of the ‘R’ growth rate of new infections, which is shown below. An ‘R’ figure of below 1 indicates the virus is in decline, and it is notable that all European countries have been able to maintain R rates below 1 fairly consistently over the past month despite a relaxing of lockdown measures.

One of the problems in understanding this virus has been poor data and the differences in testing and recording of cases and deaths, making international comparisons extremely difficult. Although poor at testing in the early stages of the crisis, the UK now provides perhaps the best data set to monitor, being one of the hardest hit and most densely populated large nations. Testing rates are now the highest in Europe for a major country, and the data recording of both new cases and mortality is consistent, timely and fairly comprehensive. It is encouraging to see that the R number in the UK is steadily declining which is consistent with the fall in mortality rates.

One striking feature of the data is the similarity between countries albeit with some outliers such as Germany. Despite significant variations in lockdown approaches, the progression of the virus seems to be fairly consistent. Sweden and Japan are clear examples where there was little or no lockdown and yet both countries have followed similar paths to those that embarked on complete lockdowns, although there are clear correlations between countries linked with temperature, obesity and population density. As the summer rapidly approaches, is it just possible that the virus is burning itself out naturally?

Market Outlook

That is the critical question now for markets. Following a significant recovery, we are now entering a decisive few weeks.

The lockdowns across Europe and America have either been relaxed or are fragmenting of their own accord. Pictures of Bournemouth beach this weekend showed little signs of social distancing let alone lockdown. If we are going to see a second wave in the summer, then we should see the first signs of it very soon.

If we do, then we can possibly expect another sharp setback and move lower in markets, but if not, then it is likely that the recovery will hold and will gradually improve as economies pick up pace again. There are plenty of other risks, such as a deepening trade war with China or the stresses in the financial sector; however, for the next month or so it seems a binary outcome: will we see an immediate second wave or not?

We think that there is about a 30% chance of an immediate second wave. Natural social distancing in the population, as people are much more conscious of the risk; warmer weather with less indoor exposure; effective test and trace capabilities coupled with a much higher initial spread and exposure in the population should all help to supress the virus.

A recent antibody study in London indicated that 17% of the population had already developed antibodies. In addition, it is estimated that many people are able to fight off the virus without needing to develop antibodies. It is possible that in excess of 30% of London’s population has already had exposure to the virus, and this will have a significant impact on the ongoing transmission rate.

This suggests that the greatest threat of a second wave is likely to be as winter approaches, from October onward. In the meantime, markets may continue to surprise with a gradual but continued recovery, supported by the extreme monetary and fiscal policy measures that have been introduced.

Our strategies and portfolios are positioned to do well in this environment, but we are watching the data very closely and ready to reduce risk exposures if needed.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

With the airwaves and the papers full of Coronavirus material, it is surely time to visit some other subject.

So why not reheat last year’s overbaked subject, Brexit, instead?

In truth, while still down on the news agenda this subject is once again hotting up.

To recap, the UK’s Withdrawal Agreement passed through Parliament in January with barely a whimper. The UK was then in the ‘transition period’, which would permit discussion about the future trading relationship between the UK and the EU.

Originally this was supposed to last a year and nine months, following an anticipated exit in March 2019. But given the bill only passed this January this has been significantly curtailed to eleven months.

A month ago, most commentators took the view that the damage from COVID-19 was so severe that the government would just extend the transition period into next year to avoid ‘a second cliff edge’, or withdrawal with no deal in place and therefore future trading on WTO terms.

However, that view seems to have changed over the past four weeks.

Both sides seem to be so far apart that no hope of an acceptable agreement seems possible. Whether this is due to the difficulties of negotiating in virtual meetings, or an underlying impassable gulf in the two sides’ ambitions, is difficult to say.

But with the UK government last week publishing its proposed tariffs (or exemptions on tariffs) in a post-EU world, it seems the UK is now planning aggressively for a no deal scenario. Tariffs will be retained on autos and agricultural goods to protect UK producers, but otherwise largely abolished.

From a UK perspective, the stumbling block is the ‘level playing field’ that the EU is insisting on, under which the EU would continue to have oversight, and effective control, over UK customs and other regulations. The government’s view is that this is completely unacceptable fora sovereign nation.

Under membership of the EU, of course, sovereignty is forfeited. For the UK to then remain subservient to EU control and the judgements of the European Court of Human Rights would surely make no sense at all. Why bother leaving to ‘take back control’, if you don’t get any more control than you had previously.

The EU also wants access to UK fishing waters on the same terms as before. Meanwhile, the UK wants access to the EU for services companies, particularly financial services.

A bare free trade agreement covering just goods and exempting fishing and services seemed like the most likely scenario a while ago. But the EU’s insistence on level playing field control looks to have scuppered this.

Earlier in the year, with Boris firmly in control, an overspill of the ‘transition period’ into next year would have seemed plausible.

But COVID-19 has arguably made the situation so bad that leaving on WTO terms won’t make things appreciably worse. We are already in the worst recession since the 1930s. Movements between the UK and the EU have already come to a standstill while trade between countries is significantly reduced.

The UK’s hand is discernibly stronger because of the Coronavirus. No wonder Michel Barnier has been accused of losing his rag recently.

In a sign of opinions hardening, a lot of column inches have been spilt on the matter in the past few days.

A piece in this week’s Spectator magazine puts the case that there has never been a better opportunity to leave on WTO terms. If the UK doesn’t go now, the EU will doubtless keep stringing it along until a future Labour government revokes Brexit. The delay to leaving last October was not Boris’s fault, but any future delays will be pinned on him. The magazine also makes the case that the Labour Party probably won’t protest too much, even though Keir Starmer is a firm remainer, given it will wish to reclaim the Red Wall at the next election.

In the Telegraph, Roger Bootle put a similar case for leaving on WTO terms. If the UK remains in the ‘transition period’, it will have to sign up to the next (higher) EU budget. Lack of clarity on the UK’s future trading position with Europe will prevent it from signing up to any free trade agreements with other countries. He also suggests that remaining tied closely into Europe will probably mean the UK has to participate in any future bailout of Italy.

On the other side, the remain-leaning Financial Times had a leader in last Thursday’s paper, saying it would be irresponsible to leave on WTO terms with the economy so weak, while in Friday’s FT, the columnist Martin Wolf said that a no deal exit would be ‘disgraceful’.

So it’s all to play for over the next few weeks.

My guess is that the UK walks away in June, but that a limited free trade agreement covering goods is agreed by the end of the year.

As usual, though, with the EU – only at the last hour.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

Seven weeks into the crisis and the numbers are staggering.

UK GDP looks set to fall -25% in the second quarter of 2020, the worst drop since 1709 when the ‘Great Frost’ occurred and ‘birds dropped out of the sky’ it was so cold. The US economy may decline -35% in the same period – worse than anything that happened in the Great Depression.

Last week it was revealed that UK retail sales fell over 5% in March – the worst showing on record. Meanwhile US unemployment claims have hit 26.4m in four weeks, a rate of 15% – again a spike like nothing witnessed previously.

The government plans to sell £225bn of bonds over the summer to fund the crisis, taking the UK budget deficit as high as 15% – never before seen in peacetime.

One can enumerate plenty of other statistics like this.

There’s a lot going on when the use of the word ‘unprecedented’ is itself unprecedented.

On the positive side the lockdown measures are starting to work. All European countries have started to drop away from the exponential line. If the lock down measures can be maintained for a couple more weeks, there is reason to hope that new case rates in Europe will start to fall rapidly and the deaths will also stop growing.

We need to see the new case rate fall to an average of below 10 new cases per million of population per day to get COVID-19 back under control, and this is possible within the next month, even in the USA which is about two weeks behind Italy.

Meanwhile the urgency to get the economy moving again cannot be underestimated, though the timing is critical – too early and we risk a second wave, too late and the economic damage will be too great to bounce back from, no matter how great the stimulus package.

At this stage, politicians are rightly focused on containing the outbreak. With the media counting every casualty, this is understandable. However, the debate needs to begin focussing on how to restart the global economy as soon as possible and avoid a recessionary spiral that will cost far more lives in the longer term.

There are some reasons to be optimistic. It is encouraging to see China relaxing restrictions in Wuhan and starting to get the country back to work. There is also growing confidence that some treatments are helping, most notably the use of convalescent plasma therapy, which was the most common way in which viruses were treated before vaccines became widespread.

Interesting evidence is also building to suggest that the proportion of very mild or asymptomatic cases of infection is much higher than previously thought, with testing of cruise ship passengers, survey data in Italy and current testing in China suggesting asymptomatic cases may be somewhere between 30-70% of all cases. If true, this would suggest the outbreak has already spread far wider than previously estimated with the positive implication that the mortality rate is much lower than currently understood.

From a market perspective, we believe the news-flow is likely to remain supportive of a continued recovery in markets. Q1 earnings have been poor, but that was expected. In terms of the full year impact on corporate profits, S&P earnings are now expected to fall 8% in 2020, versus an expectation of 7% growth in January – a downgrade of 15%. This assumes that the economy gets back to some kind of normality in Q3 and Q4. World governments remain committed to injecting massive stimulus, particularly on the fiscal side. Stimulus in the US is approaching 35% of GDP.

In terms of a roadmap for how we get out, it looks as if the world starts going back to work between May 8th and 15th or just after, at 75% capacity.

The staggered industry order would be: first construction… then manufacturing… then the retail, wholesale, and distribution industries. Pubs, leisure and flying look to be the last in the queue.

With a phased return to work we may be able to see an end to the crisis, as long as we don’t get a second spike and another enforced lockdown.

Governments will want to restore normality as soon as possible, rather than allow a recession mindset to get entrenched.

Some perspective is helpful in all this. The world got through the financial crisis, the Eurozone crisis, and September 11th before that, and hopefully we will get through this too without too much further mishap.

Just add ‘global pandemics’ to the list of investment risks, alongside slow growth, high debt levels and Brexit.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

Trustees with exposure to any of the major asset classes have just experienced the most volatile quarter in living memory. Equities, bonds, commodities and alternatives all suffered as a wave of volatility washed across every investment shore. Multi-generational wealth built up over decades has, in some instances, been destroyed in the space of a few weeks.

In the midst of this turmoil, interest rates have been cut to historic lows across all major currencies, presenting a significant challenge to trustees who, through prudence and caution, were positioned in cash. Whilst inflation hasn’t risen in the short term, harbouring non- or negative yielding assets will inevitably lead to capital erosion over the longer term.

Yields on gilts and investment grade bonds have reduced materially and many defensive stocks have cut their dividends either by choice or under duress from central banks. Ratings downgrades have passed almost unnoticed and one might question where the economic concept of a ‘risk-free’ rate remains viable.

Navigating the New Investment World

Never has it been more important for fiduciary professionals to assess and consider the suitability and appropriateness of the investments held within structures under their care. Whilst benchmarks and gatekeepers serve a valuable purpose, the ultimate responsibility to beneficiaries rests, as it always has, with the trustee.

The road to economic recovery may be long and whilst equity markets may have rebounded (at the time of writing the S&P500 had regained its October 2019 level), market participants will be subjected to considerably higher levels of volatility than they have become accustomed to over the past decade.

For ‘moderate’ risk mandates, there is a temptation to try and recover lost ground by deploying more capital to equity markets; however, this fundamentally shifts the dynamics of a balanced portfolio and may be outside of the confines of a trust’s investment policy statement. Trustees may also be drawn to more esoteric investments promising uncorrelated returns, invariably such strategies are not marked to market and illiquid.

Finding the Right Investment Strategy for a Trust

The immediate challenge faced by trustees as they review their Q1 statement is, once the damage has been assessed, to consider whether the pre-COVID-19 investment strategy will be suitable and effective in meeting the investment objectives of the trust.

Within our Investment Requirement and Risk Profile Questionnaire, we ask investors a set of questions to assess their risk tolerance. In ‘normal’ times, this process often seems academic and many clients, trustees and advisors complete the form as a box ticking exercise.

However, in bear market conditions the questions come alive and provide a true test of an investor’s appetite for and tolerance of risk.

Let’s revisit a selection of the questions. I invite you to ‘re-score’ along the way using a scale of 1 to 10 or the relevant time period:

1.All investments involve risk. What level of short term loss are you willing to accept in pursuit of long term investment returns?

Very Low (<5%) —————– Very High (>35%)

2.How long are you prepared to hold your investment after a fall in markets to enable it to recover?

6 months —————– 10 years+

3.How would you respond to a sudden fall in markets? E.g a 15% fall in 6 months.

Sell all  —————– Invest more

4. How comfortable are you making investments?

Very anxious —————– Very comfortable

With the benefit of recent experience, you may find your responses are altered and of heightened relevance as you evaluate how to preserve and grow capital or generate income in the current financial landscape.

How Can We Help Trustees?

As an investment business we will be providing a series of webinars for trustees to assist with reviewing and revising risk profiles and investment objectives of the trusts in their care. We will also make available a library of resources as well a Q&A forum to provide practical support for trust investments.

We invite you to join us for the first webinar in the series that will be hosted on Tuesday 5th May at 3pm (UK time).

Follow this link to register for the webinar: https://hopin.to/events/risk-tolerance-revisited

You are of course welcome to contact our team prior to the webinar with any questions you would like us to cover, please do use us as a resource.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.