So where do events & markets go from here?
The spread of the virus globally is highly likely to worsen from here and may continue to do so for another six months. The situation varies from country to country, partly dependent on different governments’ response to the crisis. Here in the UK we are coming to the end of our second week in lockdown and whilst the death toll continues to rise, the rate of new infections should, in theory, begin to decline. Eventually, we should then move to a “new normal” where the virus is present but managed in ways akin to common flu and the lockdown can start to be gradually lifted. This is unlikely to occur for some weeks yet, however.
The short- term economic effects of the lockdown are already proving significant. Whilst this is most evident in the likes of the leisure & tourism and retail sectors, the lockdown is starting to bite right across the economy as a large amount of business activity is simply now “on hold” or being cancelled altogether. A recession would, therefore, appear to be inevitable, but our assessment is that this is likely to be relatively short-lived. Should the lockdown, however, both in the physical and economic sense, continue for a prolonged period of time, this may prove terminal for a number of small businesses as they simply run out of cash. We are, therefore, very conscious that this is an extremely stressful time for many business owners and their employees alike as they try to weather the storm.
Subsequent to any recession, global growth will potentially spring-back in the final quarter of the year or the first half of 2021 as much consumption is merely being deferred and not cancelled altogether. That said, if the spread of the virus does reach a far greater proportion of the population, this will have a deeper negative impact on the general level of economic activity meaning the eventual bounce back will be slower to materialise.
So, what should we be doing about it?
The immediate response is that, at least as far as Brewin Dolphin is concerned, we have not been blindly selling equities. The pace of change has been such that selling has been indiscriminate and while travel and leisure stocks have borne the brunt, no company has escaped unscathed, irrespective of size or strength. While the virus may be totally new to us, we have seen markets panic several times before. As an investor, it is exactly when you feel you cannot bear it anymore and would rather sell the lot, that you should stay the course. Share prices are factoring in a doomsday scenario and we believe we will emerge from this corona lockdown and companies will get back to doing what they do best.
Brewin Dolphin’s Approach
With that in mind, I would describe the next step as targeted rebalancing and this is one of the benefits of having your investments, be they wrapped in a pension or otherwise, managed on a discretionary basis. Our clients’ portfolios have exposure to gilts, bonds, absolute return funds and cash – all of which have either remained rock solid or least avoided the worst of the rout. It is equities, that have endured the pain and it is in these same equity markets that the opportunities lie and it is our job to identify these and take full advantage for our clients. We do not need to rush into action, however and do not need to call the bottom, but we’re looking to the longer term and as things stand, the exposure to key equity markets is lower than it should be. We’ll therefore be adding to our highest conviction stocks which remain terrific companies and which offer attractive long-term returns from these levels. We’ll also be adding new stocks that we previously judged as being over-priced but where we now cannot pass up the opportunity to build a stake for the future.
Global stock markets have fallen into bear territory, but markets do settle down and common sense prevails. When this happens, the rebound could be extremely strong and we have to be invested on those days. Looking back over the twenty-year period from 1999 to 2018, it is staggering to think that had you missed only the ten best days in the stock market, your overall return was cut in half. It is vital that investors stay the course and continue to adopt a long-term view. The moment that there is even a sniff that the worst of this is behind us, the predatory spirits will re-emerge in the market.
I appreciate that there is huge uncertainty, but if you do have questions or concerns about any pension assets or other investments you may have, or falling levels of investment income and want to pick my or a colleague’s brains on an informal basis then please feel free to get in touch.
Chris Black, Divisional Director Financial Planning