March 23, 2020

Covid-19 and Financial aid – 23/03/20

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The Past Week In Markets & Protective Action Against Covid-19

A few weeks ago global stockmarkets were at record highs, supported by data on the US economy which indicated continued growth ahead. But as Covid-19 made its way to Europe and the US, markets turned quickly into the fastest declines on record with extreme intermittent volatility. With worst case scenarios being extrapolated fear of a recession has moved to the forefront of many minds. The pace with which markets have shed value is unprecedented in living memory. Covid-19 and Financial aid is the conversation piece of this week.

Last week saw the worst stockmarket falls since 2008 leaving the S&P 500, in Euro terms, 25% down year to date but 34% off its high on 19 February. The UK FTSE 100 which showed very little growth at any stage this year has fallen 35%. Ironically, Shanghai and Hong Kong stock markets are only down 14% and 17% respectively YTD in local currency terms.

Moves are afoot in the US to inject more money into the problem than was used in the TARP program of $700Bn in 2008. As a result, the US Dollar has strengthened by over 6% in the last 2 weeks. While big global businesses will generally emerge bruised, the brunt of the current crisis is falling on the small business owners which depend on current cashflow to pay their suppliers, their employees and lastly themselves. These problems will feed back into lower economic activity and lower tax revenues as well as increased strains on governmental finances worldwide.

A Little Bit Of Medical History

Few will remember the Asian Flu which started in China and then spread to Singapore in February 1957 before hitting the US later in September. It claimed 1.1 million deaths worldwide including  116,000 in  the US. The US population at that time was 172m, today it is close to 334m, making it the world’s third most populous country behind China 1.39Bn and India 1.31Bn.

What’s The Medical Situation?

As at 7.30 am US EST, Monday 23 March, globally there are now, according to John Hopkins University, 341,000 infected with 14,700 deaths. At this point in time there are 34,000 infected and 400 deaths in the US. It is fair to say that the US has been slow to initially acknowledge a possible pandemic and take appropriate measures nationwide until last weekend when several State’s governors took the initiative and started voluntary lockdowns. New York’s Governor Cuomo has expressed an opinion that his State may run out of medical supplies in the next 2 weeks. The UK, for its part, has also been slow to implement necessary action and has most likely foisted undue stress on its healthcare system as well as increasing the probability of unnecessary deaths. Both of these countries lie at the heart of global financial system.

What’s The Stockmarket Outlook?

Most countries are now preparing for their own individual surge numbers of infections once increased testing is rolled out. The number of infections will soar dramatically in the US and the UK, as well the number of deaths. This new medical reality will impose further financial strains on their economies which will ripple across the world. Already a global recession of some sort is being acknowledged for the coming months as GDP is expected to drop by up to 15%. As stockmarkets price in economic events of up to 9 Months I expect to see increased panic leading to further market volatility and further plunges in stockmarket valuations. Some estimates are for a further 20% drop, which would leave global markets at about 50% down year to date.

Current valuation disparity

Such pricing would put valuations further down than what was experienced in the 2008/2009 Great Recession which lasted 18 months as corporate profits fell 46%. Because of this we need to remind ourselves that panic selling is never permanent. As the virus response ramps up and becomes more successful with the passage of time, confidence in business will return as future returns to levels of profitability become obvious. Markets price issues in before they happen. Business conditions will get worse. The infections and deaths from Covid-19 will get worse. But markets will also start to go back up before a recovery is acknowledged.

So What Am I Telling My Clients?

Still nothing has changed in my advice:

Firstly, a major buying opportunity is coming up in the coming weeks for those who have cash holdings either personally or in their pension funds.

If you are invested already, keep the faith by riding out a likely further downward movement of the next month. If you are considering selling out with a view to coming back in at a lower price, don’t! These markets move far too fast to not be certain of missing the upside when it comes.

Focus on Pension Preservation

If you are continuing to make, say, monthly contributions to your pension fund then the next few months will be an opportunity to invest at cheaper fund prices than in the past.

Clients who are nearing retirement, but who intend to avail of an Approved Retirement Fund option upon retirement, should remember that your investment horizon is not time limited to the date of your retirement. Rather it extends to the length of your lifespan and most likely that of your partner also, in which case maintaining equity exposure to achieve real returns above inflation over time is, and continues to be, as important as ever.

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