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.
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?
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.