01 May 2020
How well you preserve assets at difficult times like this is disproportionately important to your making decent long-term investment returns. My key job is to try to safeguard people’s savings, despite much of the data we normally rely on being questionable. It helps that I was trained by people who lived through the market shock of the 1970s and listened to their stories.
Back in 1973 President Nixon took the dollar off the gold standard, plummeting it in value and triggering a global financial crisis that few foresaw.
Unfortunately for Nixon (and millions of others), oil is priced in dollars. Tricky Dicky’s action slashed the real incomes of Middle East oil producers, who responded with uncharacteristic collaboration and cut production. Oil prices rose fourfold by early 1974.
This was an unexpected shock to western economies. Banks collapsed in the UK, as did some well-known indebted companies. The BBC did not lighten the mood by commissioning Survivors, a series based on the world being wiped out by a pandemic. It proved very popular.
The decision by a series of UK governments to intervene in the economy, controlling prices and incomes, arguably made matters worse. Ted Heath capped pay rises, angering miners – who were eyeing a 35% wage hike. Their industrial action – or, rather, inaction – halved production, forcing coal-powered Britain into a three-day week to conserve energy. Britons stockpiled candles rather than loo rolls. Labour’s Jim Callaghan also tried freezing wages and rents. The failed approach was brought to an end only after the 1979 election.
Investors are now assessing the impact of another economic shock – that one was inflationary shock, this is deflationary.
Identify challenged sectors early
Avoiding industries that will see a longer-term impact is the first priority when aiming to preserve your savings during a period of market uncertainty. In the short term it is evident that the leisure and travel industries have serious issues. Restaurants, for instance, will reopen gradually, but many will not have the resources to last. Even after the virus is under control, there may be a longer-lasting reduction in demand for travel.
As the current social measures are relaxed, investors are trying to anticipate which industries will be allowed to return to normal and in which order.
House building may be early to restart, but it could take longer to rebuild the confidence that leads to house buying. Perhaps a year? We still do not know how deep or how long the current slowdown will be. Fifteen million additional Americans applied for unemployment benefit in the past three weeks; they are unlikely to return to work swiftly. Rishi Sunak has been generous but still left a significant swathe of the UK population struggling.
Be wary of debt risk
Many businesses fail when faced with an economic shock, often through the misfortune of lacking short-term funding. Central banks have pledged support, but this does not always reach its targets – and (quite rightly) governments are wary of bailouts for large corporates that do not really need help.
Manufacturers with complex supply chains could face a different challenge – waiting for every supplier to return to full production. A modern car has 30,000 parts, and you can’t miss any out.
Identify new paradigm winners
On a more positive note, we are starting to identify the sectors we will rely on in future. This includes companies that allow us to work at home – from providers of telecommunications to anti-virus software, cloud computing hubs and (in my case) remote helpdesks for when things go wrong.
Companies like Amazon may be seen as part of the solution in these circumstances and may attract less criticism. Although Amazon is the largest holding in my funds, I still wish it would pay a normal tax charge.
Healthcare winners may prove more complex to identify. It seems clear that our hospitals will need greater capacity to cope with further waves of similar viruses and other pandemics. This extra capacity will be in intensive care but also, presumably, in other critical areas like respiratory, renal and cardiovascular care.
In the UK this requires planning and investment through the NHS. In other countries it is less clear who would pay for this. In a mixed-payment or principally privately insured system, such as the US, there seems no obvious mechanism.
Furthermore, companies are keen not to be seen to profiteer from the current crisis. US pharma company Gilead has backed down from applying for ‘orphan status’ for its potential Covid-19 treatment, which would have made it a monopoly supplier of the drug. One hopes this will not deter others from pursuing potential cures and vaccines.
Monitor government interventions
Lastly, the state has chosen to extend its role in markets very sharply during this crisis. Telling us all to stay at home is clearly justified; paying wages to furloughed staff is generous; telling financial companies not to pay dividends is harder to justify and will reduce the support the market gives these companies in the long run.
The ambition to soften the economic impact is laudable. However, as we found in the 1970s, it often proves much harder for the state to withdraw than to pile in.
The 1970s taught us other valuable lessons, though. It may take a while, but businesses do get through these times and can prove extremely ingenious in coping. The seeds of radical positive change are often sown in the depths of crisis. In 1975, while Britain was glued to the dystopian world of Survivors, Margaret Thatcher took control of the Conservatives and Brian Clough was appointed manager of a struggling Second Division team called Nottingham Forest. Four years later Forest were crowned European Champions. As for Thatcher…
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Mid Wynd International Investment Trust
THIS INFORMATION IS FOR INVESTMENT PROFESSIONALS ONLY. IT IS NOT FOR USE WITH OR BY PRIVATE INVESTORS.
This information does not constitute an offer, invitation or solicitation to deal in the securities of this fund. Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority. Financial advisers and retail investors: The company currently conducts its affairs so that the shares in issue can be recommended by financial advisers to ordinary retail investors in accordance with the Financial Conduct Authority’s (“FCA’s”) rules in relation to non-mainstream investment products and intends to do so for the foreseeable future. The shares are excluded from the FCA’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.