“The latest government advice seems to be pushing us towards a compulsory lockdown in an attempt to contain the spread of the virus pushing the UK economy further into the deep freeze. Markets responded in kind with a 5% opening fall in the FTSE100 this morning effectively wiping out the tentative gains from last week. Despite all of the negative press headlines it is clear that a new normal appears to be taking hold with the FTSE100 continuing to trade around the 5,000 mark for over a week, with a gradual reduction in volatility.
It is not yet clear whether stock markets will fall further as the crisis has occurred so quickly it is difficult to assess how deep and how prolonged the effects to global productivity will prove to be. Government response both here and overseas has been rapid and wide reaching and obviously designed to minimise the impact on the individual economies although clearly at substantial cost.
So far government actions particularly in the UK and US have been well received and have prevented a higher degree of melt down in financial markets. Looking ahead, inevitably all of our clients have seen their portfolios fall in value although i am pleased to note that the risk controls we have in place have been largely effective and for most the levels of losses are modest compared to global stock markets.
Looking ahead i would reiterate the advice that we, like all of our clients, are in the business of long term investing and the fundamental rules of modern portfolio theory have not changed. Much about this crisis is unique, it is not a man made systemic failure of the economic system, it is random ‘act of god’ hence the rapid decline in stock values as the realisation emerged that we are facing our first global pandemic in 100 years.
The good news that receives little coverage is that this is a virus and like all viruses tends to have a limited shelf life which would imply that its impact on the global economy will also be short lived, what we do not yet know is how much damage will be inflicted before we move to the stage of recovery.
Equity markets are less interested in where we are but upon where we are likely to be in the future and the expectation for future company profits, such is the speed of this pandemic that there is little data with which to work in order to assess the damage and the likely impact on these future earnings and until this emerges we are unlikely to see significant positive movement in markets. This will change in the coming months as the media narrative shifts from disaster to recovery and this is the point when markets will start to recover. I have no idea exactly when and i do not know if the situation will deteriorate first but i am very confident that the present position will look less bleak in 6 months and markets will respond to this improved outlook long before this. Hence expect a long slow recovery from the summer and well into 2021.
As I assess the impact of this virus on markets and its corresponding effect on our client’s portfolios I am mindful of the human cost of this crisis; as a business, we have prepared for this scenario so hopefully you should not see any change in the service we are able to provide for you, whilst most of the staff are now working from home we have systems in place to ensure that we can continue as seamlessly as possible.
I appreciate that this is not always the case for many of the small businesses that you may run, however as our clients, we continue to monitor developments closely including identifying any possible government grants that may be available to help you through this difficult time. For those of you self-isolating please feel free to pick up the telephone and speak to us both for financial reassurance if necessary but also for the human contact. This situation is not fun for any of us perhaps together we can make it just a little less frightening and a little more bearable.”
Matthew Pescott Frost