Andrew Milligan OBE, Head of Global Strategy, Aberdeen Standard Investments
Financial markets are attempting to price in a rapid and unprecedented series of shocks to the world economy. The net result has been the fastest bear market in the history of equities. Should investors buy or sell even at these depressed levels for the FTSE100?
To answer such a question, we need to know several facts. Firstly, will public health measures, especially the creation of effective vaccines, bring this pandemic under control within a few months? Unfortunately, most experts emphasise the impossibility of knowing an answer at this stage. Secondly, how effective will the monetary and fiscal responses be from governments around the world. Clearly many economies will experience a short, sharp recession. The shut-down of so much travel and entertainment, so many shops and borders, will ensure that is the case. The key issue is how long will the recession last. Unlike the 2008-09 banking crisis, this is a widespread demand and supply side shock. Central banks have responded aggressively, with sizeable interest rate cuts plus a series of measures to ensure banks continue to supply credit to their borrowers. This is necessary, but not sufficient. Many households and businesses, small and large, will need cash flows to keep them afloat and prevent bankruptcy or default. Measures to support local restaurants or nationwide cinema chains will necessarily be different to car parts suppliers or national airlines. Politicians are slowly preparing the country for a really major expansion of government debt; we saw the early indications in the UK Budget a few weeks ago. Examples could include faster benefit procedures, more sick pay, holidays for business rates, long-term company loans.
Bond markets are pricing in close to zero interest rates and weak inflation for the foreseeable future.
What do market valuations tell us? Bond markets are pricing in close to zero interest rates and weak inflation for the foreseeable future. This makes considerable sense; politicians should focus on debt servicing rather than overall debt levels. Equity markets are pricing in a recession, but clearly could still fall further if the downturn lasts 9-12 rather than 3-6 months.
Amidst a blizzard of conflicting facts and figures, a few key issues are worth focusing on. The first is the rate of improvement in the corona virus statistics. The second is the speed with which governments use their fiscal firepower to support households and businesses - as in war time borrow today and sort out the bill tomorrow. Economic data will be poor for some months but signs are appearing in the economies first affected by the virus, such as China and South Korea, that commercial activity has started to recover.
Some of the implications for investors are already clear. Profits will take a hit. For those building up a pension pot, it will take time to re-build wealth, as it did after 2000 or 2008. For those relying on an income then suspensions to dividend payments are possible. So the emphasis should be on searching for quality companies which can survive the pandemic, investment firms who can be dynamic in their decision making, and absolute return funds designed to withstand this sort of crisis.
