Coronavirus or Covid-19 Investment update 25 March 2020

Coronavirus or Covid-19: It’s not (yet) over.

The wave of the coronavirus pandemic has left China and is now over Europe and heading for the US.

There are many influences for investors to be aware of.  Firstly the panic selling of anything that could be sold and this at virtually any price. Then there is the current oil price war between Saudi Arabia leading the OPEC countries and Russia. Finally we have the virus itself which is causing fear and consternation among the public and governments in every country in its path.
At long last, the developed worlds’ central banks and governments have reached agreement on the fiscal support mechanisms necessary to keep the world afloat and alive, if not actually vibrant. The last government to sign up to a package of sensible support measures was the United States. Even when the need for action was clear, there was an attempt to support politically friendly large companies and underplay the support for the poorer communities. This took a day or so to clear, but now the coast is clear for a major support package from Washington.

Many investors were forced to sell their holdings including gold, at the lowest prices because they had to meet their obligations. Many ETFs and automated trading systems, especially those with leveraged strategies have major losses which will still be announced. The extreme movements have also shown which fund managers have performed well in adverse circumstances and which stuttered and perhaps failed. This term is called ‘downside capture’ and recognizes the relative performance of a manager in falling markets. I will be adjusting my clients’ portfolios to reflect the lessons learned from this crisis.

The investment markets, especially the stock exchanges began their rebound in the expectation of such coordinated action, but the recovery is still weak and could be fragile. There is however still no roadmap except perhaps for the very long term. It is clear however that many institutional investors and funds must rebalance their portfolios at the end of the month and quarter and will be buying the equities of many different sectors.

The equity markets in Germany suffered surprisingly badly in the past month (yes, it was really just a month), this despite the fact that Germany has so many excellent engineering and electronics companies. Pertly this reflects the fact that the DAX 30 index only has 30 major companies in it. Partly also that short-term traders could not escape their trades in Equities and Indices quickly enough. When an on-line trading platform collapsed under the deluge of sell orders, many short-term investors had to accept major losses.

The future recovery will not show a friendly straight line. The first day of positive results on Tuesday 24th March reflected pent-up frustration that the investment markets had fallen too far. There will be setbacks on the journey to recovery and it is clear that there will be a short global recession based on the closing of many businesses during the battle against the virus.

It is interesting to note that the central bank measure have all but abolished interest rates potentially for a longer time. This will prove to be an aid for weaker economies and companies, but there will still be a number of bankruptcies as customers stay away and there are no reserves to cushion the blow.

The German economy will recover relatively quickly especially once their workforces return to productive work and their customers start buying again. Germany also had a disciplined budget which allowed swift financial support for the stuttering economy.

Italy by contrast has no reserves and no disciplined fiscal policies and has called for a major support package from the European community.

The United States of America built up no fiscal discipline and spent and borrowed very heavily during the rich years. The present fiscal measures going through congress and the senate will heavily increase the level of governmental debt. While this is the wrong time to explore fiscal conservatism, it will fall to the US treasury and the government as a whole to rein back excess spending when the crisis is past.

Economic recovery will depend upon heavy investment which will undoubtedly be rewarded when more stable markets have returned.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung.

He is a Fellow of the Chartered Institute for Securities and Investment in London.


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