How to sum up 2020 so far? A rollercoaster is probably the best way to describe it; both from an emotional perspective but also in terms of what the markets have been up to. Over the first quarter, market participants went from being blissfully ignorant to a state of panic as the significance of global lockdowns became apparent and investors were left wondering what the crisis would mean for the economy and companies; not to mention the humanitarian cost.
At the start of the lockdown we made the strong case that while the short-term risks are large and palpable, the virus wasn’t unpicking the very fabric of society nor the efficacy of capital markets to reward judicious investments. Some businesses will fall by the wayside through this extraordinarily difficult period, but to presume that all businesses would be materially wounded in perpetuity seemed too gloomy a prediction for us. Added to this was the certainty that we will, collectively get through the short-term pain caused by the virus. The human impact has been deep and terrible, but this is not the first pandemic we have faced nor will it be the last. Humanity is resourceful, agile, adaptable and humanity will find ways to exist and flourish again despite the virus.
Now that we have retraced much of the falls, the question is ‘how much is in the price?’ We feel that much of the developed world is through the period of maximum economic pain. The self-imposed lockdowns are being tentatively unwound and while we are yet to see concrete evidence in the economic data, we can assume that the last month or so will see an improvement in terms of consumption. If we continue on this trajectory, the second half of 2020 may make up some of the huge amount of lost ground from the first half.
Whether the economic recovery is V shaped remains to be seen, but the performance of stocks is unquestionable – the market recovery has almost been as sharp as the pullback earlier in the year, meaning that global investors have had to weather both a bear and a bull market within a matter of weeks. It’s not surprising that investors are feeling a little punch drunk, and a period of relative inactivity in the markets provides an opportunity for us all to take stock and reassess how we think things will go from here.
When considering the impact on businesses, some will be deeply scarred by this crisis. It is difficult to envisage business travel, for example, returning to 2019 norms for the foreseeable future. It is difficult to see how leisure businesses will be anything but hamstrung by social distancing and cleanliness requirements. The best businesses, even in these chastened sectors, will find a way to prosper but the weak could perish . That is why balance sheet strength and good management are key and that is why we believe active management of investment portfolios still has such a pivotal role to play. The best active managers are able to identify the businesses that are best placed to succeed - even in otherwise unloved corners of the stock market.
We must resist the urge to be too reactionary about the longer-term impacts of this crisis, however. Social distancing has been effective and at the start we dutifully followed the stringent rules despite recent signs of fatigue. The virus has demonstrated how seamlessly we can work remotely and converse globally without getting on a plane and yet, a virtual conversation still lacks the nuance of true human interaction. A couple of months holed up at home does not roll back on millennia of evolution, and so assumptions that office space, airlines and physical retail stores are all relics are likely to be overdone.
Lessons from Japan
Richard Stutley, CFA
Economies cannot cope with multiple rounds of lockdowns on the scale of the first quarter, but the world is better prepared for new waves of the virus and hence the effect should be smaller. This is one of the reasons we remain broadly constructive on the outlook for the global economy and markets.