Welcome to another weekly bulletin.
I hope this finds you well and looking forward to a weekend of sunshine and the now de rigueur national pastime of DIY…
Financial Markets Update
The period following the financial crash up until the end of 2019 has been an extraordinary bull market. Whilst not without it’s ups, downs and scary moments, overall it was a great run for equity investors as global economies recovered and largely prospered in a post-credit crunch world. For some years a topic of great debate amongst financial planners and investment analysts has been ‘when will it end’.
The end of a market cycle is usually a result of one of three phenomenon. ‘Overheating’, where economic growth begins to get out of control. Inflation soars, central banks raise interest rates and companies and individuals begin to default on their debts, creating a domino effect that leads to a recession. Step forward the last financial crisis. Government policy error can also lead to a downturn. A change of political party making radical changes to economic policy, or perhaps a major economic disturbance event such as a poorly handled Brexit, (remember that?!) could be the catalyst for a period of economic contraction. The third is what we are seeing currently – an external shock to the system from an unforeseen event (also known as a ‘black swan event’) that causes a sudden slowdown in activity globally, leading to a recession.
In response to this external shock, governments around the world have taken massive action, with ‘wartime’ state of emergency rules adopted. As public life goes on hold and people are put under curfew, the economy and capital markets also enter a stage of hibernation. In response markets have fallen to a level where current valuations no longer reflect the likely ‘afterwards’ situation and value (rather like the public obsession with hoarding toilet roll at the beginning of the crisis!). With positive and negative forces currently in equilibrium, portfolios have been also placed ‘on hold’ in recent weeks, just like the rest of our lives. So, is this like the last financial crises?
This is not a ‘fat-cats’ bail out, as 2008/2009 was perceived and government intervention has been clear and decisive. A “whatever it takes” approach to monetary policy support and a fiscal regime change providing welfare support, business support and loan guarantees have steadied the ship and assuaged the initial panic in markets. The banking system meanwhile is well-capitalised, with more prudent intervention from governments and regulators having ensured they built up significant cash reserves in the good years, in preparation for the bad. As George Osborne once said – ‘fix the roof when the sun is shining’.
Many have warmly welcomed the idea of a gradual relaxation of the strictest lockdown constraints. However, it is currently too early to assess the probabilities for a fast and sharp recovery (the famous V-shaped version), versus a protracted slow return of economic normality (the less popular U-shaped version). As governments apply a trial and error approach to ending social isolation and economic hibernation, we simply have to watch and wait, but can take comfort from significant economic stimulus being made available to help support markets and fuel a recovery when the time comes.
For the time being pension and investment portfolios remain well positioned and diversified, whilst starting from 24th of April Tatton will be making some adjustments that will take around three to five days to complete. The changes are tactical ones, to sell some of the safer assets in portfolios and buy more equities, with a small overweight position being given to economies in the Far East that now appear to be through the worst of things and showing signs of a return to some sense of normality.
Coronavirus - a Breather for Mother Nature?
The Coronavirus pandemic is a humanitarian and economic crisis that will be remembered as one of the defining events of the 21st century. The financial strain and loss of loved ones resulting from the situation will inevitably have a deeply personal impact on thousands of families in the UK and beyond. The statistics emerging around infection and mortality rates make for startling reading.
This week however we saw data of a more positive kind begin to emerge. Striking pictures being picked up by NASA satellites show a dramatic fall in toxic emissions around the globe. The satellite images above were taken between January and February and show an extraordinary reduction in nitrogen dioxide levels over just one month in China, which has many of the world’s most polluted cities. Similar footage is now emerging of other countries around the globe, with grounded planes, reduced public transport services and a sharp decline in car travel creating significantly improved environmental conditions.
Whilst sadly it seems likely this will only be a temporary phenomenon until the world gets back to normal, hopefully some of the improvements to climate conditions may be more permanent. With businesses around the globe not only adapting to home working, but also recognising it’s potential in a digital age, it is likely that more flexible working arrangements will become a more prevalent part of business life. If this feeds into substantial reductions in commuting and business travel, this could potentially still have a substantial impact on the carbon footprints of individuals and businesses. Perhaps one positive aspect of this crisis is that in a world that has been struggling to get to grips with climate change, mother nature has been granted a welcome breather. Time will tell, but for now it seems those in urban environments can enjoy cleaner air.
With that I’ll close for today with the hope that you and your loved ones are safe and well. If you would like to discuss anything contained within this bulletin please do not hesitate to get in touch.
