A view from the desk: The acceleration of change
““There are decades where nothing happens; and there are weeks where decades happen”
It is reasonable to say that until the events of the past few months, I had not envisaged using one of my favourite quotes from A Level History to kick off an opinion piece on investment markets. That the words are those of the arch-Bolshevik and father of the Soviet Revolution goes to prove, if needed, that these are, indeed, strange times......
It is also important to note quite how far we have come (in markets and global action against the COVID-19 pandemic) in the month or so since I last wrote. Markets had plunged from mid-March and by the end of April the “bear market” had lasted just 20 days with markets recovering on the "sugar rush" of emergency economic stimulus. With UK and US markets rising again as I write (and both the FTSE 100 & the Dow Jones are now back at early March levels) would it be right to suggest that we are past the worst?
Robust economic data emanating from China certainly seems to suggest that an initial recovery to pre-Covid-19 activity levels can happen in months rather than years. However, the reality is that a full recovery from the COVID-19/Shutdown Crisis is going to take a long time and economists do not anticipate reaching a new peak for real GDP at home or in the States until the end of 2021. Despite this, though, there is a growing amount of evidence that developed economies may have hit their bottom in May as lockdowns now start to ease. It is important to be cautious, though; the evidence for having hit bottom already is not definitive or bulletproof.
Looking at the “CNN Fear and Greed index”, it showed “fear” one month ago and then “neutral” last week, before financial market participants flipped over formally into “greed” mode at the start of this week. Opinions are following share prices and share prices are seemingly being driven by the Central Bank liquidity.
Naturally, there are always multiple influences on financial markets, and especially now. Recent lockdown liberalisation shifts are clearly good news at many levels...so long as they are not reversed in the upcoming months. Certainly, based on the empirical evidence so far, COVID-19 second waves have been extremely limited across East Asia, allowing countries such as China to achieve something akin to a lopsided “V” shaped recovery over recent months.
Yesterday, I was fortunate enough to be invited to a webinar headed by Professor Paul Heath, who is a key opinion leader in the world of vaccines. He is running one of the five sites for the Oxford vaccine study and recently spoke at the Moderna vaccines investor day. In summary, Professor Heath believes that there has been substantial progress made thus far and there is good reason to be confident that a vaccine will be found. This cannot be rushed and he thinks we will only the have the data necessary for wide-scale use at the very end of this year, and more likely 2021 but there are "so many good-looking candidates" that "we have to have confidence that one or more will be successful". It is hugely positive that the scale up of manufacturing is already being done (even at risk of the trialling vaccines not yet proving efficacy) which does mean that they (as multiple vaccines will be needed to serve very different patient populations) would be immediately available for large- scale vaccination once approved.
Whilst we wait, global markets move ever higher, despite dire economic challenges and it remains unclear if this can continue. Governments and Central banks remain determined to do everything necessary to prevent the depth and length of recession that the greatest pessimists are predicting. Consensus appears convinced that the ECB’s Euro750bn Pandemic Emergency Purchase Programme will be expanded whilst in the UK former Governor of the Bank of England Mervyn King has said: "In the end this will have to be paid for by much higher borrowing. We shouldn't worry about the scale of that at this stage”.
And what of the US? With the clear lack of attractiveness of bank deposits and Treasury Bills at negative real interest rates, the tidal wave of cheap cash appears to be finding fresh homes in the stock market. “Don’t fight the Fed” has been a truism through the ages and the Federal Reserve has taken an additional $3trillion of debt onto its balance sheet. However, with this stimulus finding its way to “Wall Street” rather than “Main Street”, could the government over the pond be storing up significant political issues for itself?
Russ Mould (Chief Economist at AJ Bell) estimates that had the Fed’s financial stimulus been more targeted towards “Main Street” then they could have written a cheque for $15-20,000 for each household in the States. Only time will tell if this should have been the preferential route....
“A view from the desk” is not necessarily a place for politics, but social unease, leading to social unrest, could become a factor across the globe if not everyone is seen as being treated fairly as we all battle “together” in the face of the COVID-19 pandemic. This could, or would, have significant economic consequences and yet there could be solutions too with a change in thinking as we approach our “new normal”.
The World Economic Forum (perhaps trying to shed its image as a home for the mega-rich to play at the annual Davos Summit) is hailing this as a time for the “Great Reset”. This is not a time to be myopic, they say, and all countries need to co-operate to deal with the serious long-term consequences for economic growth, public debt, employment, and human wellbeing that the pandemic has created. Global government debt has already reached its highest level in peacetime and unemployment is skyrocketing. The IMF expects the world economy to shrink by 3% this year, which represents a downgrade of 6.3% in just four months! And all this will only exacerbate the climate and social crises that are underway.
If they can get “buy in” at a national level, then this approach is likely to strike a chord with people at an individual level. A Sky News/YouGov poll in the UK this week posed the question: -
“Which of these do you find most alarming?”, and the answers were: - Environmental damage – 33%
Pandemics – 15% Poverty -14% Crime – 11% Terrorism – 3%
That over 50% of those surveyed directly referred to climate and social crises as their major areas of concern, certainly plays into a sense that this is a time ripe for change. The drive for low-carbon economies could be a major catalyst of economic re-generation in the next 20 years. However, with this must also come an understanding that we live in an inter-connected world. There are “trade-offs” so, for example, you cannot currently dramatically reduce emissions without significant potential losses in employment and economic activity. If we push too hard on environmental issues then it could be at the cost of jobs, and if we fight hard to preserve “old economy” drivers then a failure to introduce improvements in sustainability could be the negative impact.
There will be economic ricochets as we exit lockdown and try to move forward, and we must keep our eyes peeled for important signposts and be ready to react. For example, in the UK, how many of the 8.5m people in furlough will return to a job in October? If, as seems likely, many join the ranks of the unemployed then the supply shock we have seen so far in 2020, could metamorphose into a painful demand shock hampering economic recovery hopes. Policy makers will need to remain alert and nimble.
Much as the next few months and years bring threats, the need for change also brings great opportunities too, especially for investors as we seek to identify investments that gain access to the new themes and leading companies. For now, we should rightly remain focused on economic recovery for the good of all – and look ahead (hopefully) to calmer times and weeks when decades of change are not taking place in such a fast-forward mode.
Graham Withers – Investment Manager June 3rd 2020