This is an anxious time for everyone, particularly investors and regular updates aim to help address this. I therefore write to summarise my understanding of events leading up to government stimulus announced this week and their effectiveness in stabilising financial markets.
Reports this week from China suggest business has returned to normal after a 4 week forced lock down (which is more readily achieved in an authoritarian state). For the first time since the outbreak, China has reported no new domestic transmissions of Covid-19 which also feels positive.
In the western world “lock down” is only just beginning, aimed to ideally reduce the spread and postpone the peak of infections. Protecting the NHS has had significant economic costs and Q2 (second quarter) company data will be poor reading. Financial markets have already repriced dramatically, to reflect this.
Interest rate cuts in the US and UK last week were ineffective in reassuring markets suggesting greater financial support was needed. Both UK & US (and other) governments have now responded with substantial financial stimulus, albeit largely loans. While loans are helpful, free money would be better. Once the lock down is over, rather than being burdened by debt, it’s important consumers are able to start spending to support retail and service sectors and aid economic recovery.
On Wednesday Christine Lagarde, the ECB’s President, announced a €700bn bond-buying spree. This feels significant as it allows governments to issue bonds, raising more money for stimulus.
The numbers quoted for this financial support in UK and US are unimaginably large but in the context of each country’s GDP (gross domestic product), they are relatively low. This leaves room for increased support which is likely to be necessary in order to stabilise financial markets.
Ironically, the worse the economic deterioration the more likely further policy intervention becomes. Financial markets could stabilise very quickly, it’s therefore important that short term sentiment does not lead to knee jerk reactions. The media reported yesterday that Property Funds have been suspended. This is a prudent measure to preserve value (by avoiding a fire sale) for remaining investors.
I remain absolutely confident that staying invested and staying well diversified is absolutely appropriate. While the news flow has been unsettling, I do not advise any action at this time.
It’s worth pointing out that stock markets have recovered from similarly large falls in the past. The most significant stock market losses have followed similar gains although the timescale for recovery is unknown.
Clearly there is a huge range of welfare and health issues to be considered alongside the economics of the situation. We’re following government guidance, face to face meetings have stopped and we have reduced staff in the office. However, my support team and I are all working very effectively from our respective homes. We can deal with emails, calls and video conferencing exactly as we would in the office. There should be no tangible difference in the service you receive.
Working from home has become the new normal. I’ve swapped my morning commute for a walk before starting work at home. It’s business (almost) as usual.
I hope this brief update is helpful at a time when reassurance is most needed. I remain available to discuss matters.
Regards
Kenny