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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.

Two weeks ago I wrote about the shock of living through one of the worst stock market crashes of all time – to rival those of 1987, and even 1929.

After the shock comes the resignation, and the contemplation of a new sort of world.

The pain to investors, in the form of market losses and dividend cuts, has also followed. The latter have been dramatic, with about 100 UK companies announcing dividend cancellations or suspensions. In some cases these have been after the company has declared the dividend, but before the dividend has gone ‘Ex Div’. This sort of action has precedents.

However, in many cases we have seen dividends axed after the ‘Ex Div’ date – or the date when a dividend normally becomes a contractual payment. This is almost unprecedented – the only example I can think of is of Northern Rock, the former UK bank, which axed its dividend in 2007 after being nationalised by the Government following the ‘run’ a few months beforehand. Northern Rock shareholders were furious, claiming they were legally due the payment, but this action was surely right given the bank was bust and no longer a going concern.

Particularly painful in this respect was the cutting of the UK bank dividends – by all five of the major listed UK banks on Tuesday 31st March. The Barclays dividend had already gone ‘Ex Div’ and was due to be paid out on the Friday, but this didn’t happen.

The banks made good profits last year, and were more than able to make the payments, with capital ratios all perfectly adequate. However, the Prudential Regulation Authority (PRA) essentially forced the banks not to go ahead with the payments, partly to shore up cash and balance sheets so the banks can extend credit during the downturn, and partly because they felt it wouldn’t ‘look good’ for banks to be making dividend payments to investors during the worst economic shock in years.

The Asian banks – HSBC and Standard Chartered – must have felt aggrieved, as they have little in the way of UK operations (particularly Standard Chartered) and yet – because they are headquartered here for historic reasons – were snared in this regulatory catch-all.

The economic situation is rapidly deteriorating with over 16 million Americans signing on as unemployed in the space of just three weeks, a rise that hasn’t been seen before – not even in the 1930s.

The US hasn’t gone for the ‘employment preservation’ strategy pursued by the UK and Europe, where governments have agreed to pay 80% of employee salaries for the next few months while the employers are in straitened circumstances.

In this respect, the word ‘furlough’ has recently entered the British vocabulary – a word I was only previously familiar with in respect of the US. To ‘furlough’ someone is to put them on reduced hours at lower rates of pay, without actually firing them. This is now becoming a regular feature at many UK firms.

Employment growth has been one of the few success stories in the UK over the past decade, so this is a big disappointment. Unemployment could rise to 10% over the next two months, higher than the 8% level it reached in 2008, if things continue deteriorating at this rate.

It could stay high after that, even assuming an eventual return to a post-COVID normal, if companies start to think they’re able to manage with less people, or if they can’t pay salaries with revenues permanently lower.

From here it’s difficult to see what will happen.

When the history books come to be written, there will be debate on whether the ‘lockdown’ was the right strategy.

Sweden and Japan didn’t follow the rest of the world with lockdowns, allowing free movement to continue, but their COVID-19 cases have been no worse than other country’s.

So has the West just inflicted a massive body blow to its economy for no apparent additional health benefit?

Of course, this is one of those ‘counterfactuals’ to which we will never know the answer.

But having taken the lockdown strategy thus far, governments will need to pivot towards getting the economy back on stream as soon as possible. Otherwise, we will soon see a huge, permanent drop in living standards.

By May, health services should have the necessary PPE, ventilators and the equipment for mass testing for COVID-19. So there will be the capacity for new cases to be treated, and the NHS won’t be overwhelmed. People should be able to go about their normal lives, albeit they may be wearing face masks for the first time.

The model for life post-COVID-19 could be post-Second World War Britain. Private investment will be lacklustre after the hit it has just taken, and companies will need to spend their time, energy and money on rebuilding balance sheets and liquidity, and in reinstating dividends. The government will need to invest more instead.

But the 1940s was a pretty raw time for most, with the economy only just emerging from its wartime rigours and troubles.

The past decade could look like ‘austerity-lite’ relative to what’s coming.

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.

Financial markets have improved markedly over the past 10 days or so as hopes have grown that Europe may be passing through the peak of the COVID-19 pandemic.

Our own analysis shows this clearly, as illustrated in the chart below. Case progression across countries is shown on a standardised basis per million of population, using log scales.

Left to its own devices, COVID-19 would progress exponentially, at least until much of the population had been infected. On this chart an exponential progression would appear as a 45 degree straight line, and one can clearly see that all countries have followed this exponential path initially.

The important point to note from the chart is when countries start to fall away from the 45 degree line; the first to do so was China where the outbreak began, although it is likely that the data out of China grossly under-reported the true number of cases. The shape of China’s chart would be the same but its position should be somewhere between Australia and Sweden, perhaps as much as 20-40 times the official numbers.

Had the world fully appreciated this at an early stage, it is possible that countries would have moved faster to contain the outbreak. Asian countries that had experienced the outbreaks of bird flu in the ‘90s and SARS in 2002 such as Taiwan, Singapore and South Korea acted swiftly to introduce containment measures. The impact of this is clear from the chart, with Taiwan in particular stopping the outbreak almost immediately.

Further afield in Europe and North America a slower response allowed the outbreak to grow exponentially for far longer, necessitating a much more severe lockdown of activity to turn the tide. However, those measures are starting to work. All European countries have started to drop away from the exponential line, as illustrated above, but we are not able to relax yet. 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 their charts will start to resemble China’s or Australia’s.

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.

This is very good news, but the margin for error is now very small. Millions of businesses have been forced to press the pause button. It’s as if the oxygen has been sucked out of the economy. Those businesses with reserves can hold their breath long enough to bounce back, but millions of small enterprises are now in real trouble. Every day the lock down continues, more will fail and more jobs will be lost.

The urgency now to get the economy moving again cannot be underestimated, but the timing is critical – too early and we risk a second wave, too late and the economic damage will be too great to simply 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 now 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 other 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 fairly positive and supportive of a continued recovery in markets at least until the Q1 earnings season in about 10 days, when we will see the true impact on corporate earnings for the first time. Expectations are already extremely low, but it is likely we will see some truly shocking earnings reports and guidance for the remainder of the year. This reality check could easily see the lows re-tested, so we must remain relatively cautious of pursuing the current rally too far.

Finally, while one individual may be irrelevant in the context of this pandemic, the news that Boris Johnson, the UK Prime Minister, was moved to an intensive care unit on Monday is a stark reminder of the very real human tragedy that is unfolding. It is easy to analyse the statistics and forget the human cost, which is touching so many.

We wish the Prime Minister a speedy recovery as we do all who are battling this dreadful disease.

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.

‘It has long been my feeling that the lessons of economics that reside in economic history are important and that history provides an interesting and even fascinating window on economic knowledge’ – JK Galbraith

The great challenge facing all market participants is to assess whether we have found a floor, have further to fall and what shape the recovery might take.

Will the global economy experience a protracted depression (L shape)? Will the unprecedented stimulus packages enable economies to limit the impact and build a gradual recovery (U)? Or will we see a sharp economic rebound with GDP expanding as swiftly as it contracted (V shape)?

volatility

Until the current volatility in markets abates, one can only hypothesise on the eventual shape of the recovery.

For a V shape recovery we would need to see lock-downs lifted, the recently unemployed back in work, a return of confidence, an increase in consumer spending and global trade restarting.

A U shape recovery is on balance the pragmatic view and one currently held by moderate market commentators.

Whilst the market may have priced in the initial impact of COVID-19 and has reacted to the stimulus package, there remains a ‘third wave risk’. Whilst neither a virologist, nor one to doubt the speed and technological prowess of leading scientists and the pharmaceutical industry, there is a risk that we will witness a false dawn during the summer of 2020 where governments proclaim that the curve has flattened. This is reminiscent of the 1918 influenza outbreak in St Louis, Missouri. Local government had managed to suppress the first and second waves of the virus through very similar measures to those we are witnessing today (masks were worn, businesses were closed) only for the virus to then rear its head a third time in the early spring of 1919 by which time the restrictions had long been lifted.

Would Governments in the US, UK and Europe have the political capital, financial resources and willingness to impose the restrictions and provide further stimulus adding yet more debt to the mountain? Perhaps China has the structure, control and technology to do so and it would be poetic if Asia were to lead the way out of the crisis.

If you have read Michael Lewis’s recent history ‘The Fifth Risk’, then you may doubt as I do that the US has the ability, resources or leadership to manage a scenario of multiple waves.

The most bearish view foresees an L shape ‘recovery’. The Great Depression that followed the crash in 1929 lasted more than 10 years, with unemployment remaining above 10% throughout the decade. We would not anticipate it being as bad as that, but one of the features we have already seen is an unparalleled spike in US unemployment with over 6.65m now out of work.

volatility

The spectre of inflation (2.3% in the US at the time of writing) is another feature that has not yet shown itself in the economic data. The next published rate is due for release from the US Labor Department on the 10th April.

As an investment team we debate the ever changing dynamics constantly and now conduct our 8.45am start of day meetings remotely as a consequence of the lock-down. These conversations utilise a wide range of quantitative and qualitative research, which contributes to our collective knowledge of the rapidly shifting economic landscape.

This process of discovery enables us to establish a view from which purposeful investment decisions can be made in the best interests of preserving and growing the capital of our clients, both in the near-term and for the longer term investment horizon.

It is at times like these that clients can take comfort in knowing that they have an experienced discretionary management team with diverse views and the acumen to chart a course through the most volatile of markets.

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.