LGT Vestra - COVID 19 update & review of the investment landscape

Monday 6 April, 2020

The investment landscape  - A weekly overview 

This week, we have sadly seen the number of deaths due to the coronavirus continue to rise, particularly in the US. Investment markets remain volatile but equities found some support at quarter end as multi-asset portfolios rebalanced to adjust for the reduction in equity weightings resulting from the big falls. Credit markets have taken heart from central bank actions and recovered some of their losses. 

“After the major fiscal and monetary policy announcements of previous weeks, this week has been focusing on tweaking the terms to make sure that the support gets through in a timely manner. ” 

Jonathan Marriott, LGT Vestra Chief Investment Officer 

Medical action 

Medically, the focus in the UK has been on getting new critical care facilities in place to better cope with the demand, with new facilities being built around the country. In times of crisis, we see the extraordinary becoming the ordinary. Who would believe that we could build a 4,000- bed hospital in nine days, but that is what has been achieved at the ExCel centre in London. Staffing these facilities will be difficult but 750,000 volunteers have offered their help and support. Testing staff for coronavirus, it is hoped, will enable medics who are self-isolating to get back to work. The UK’s ability to test has been constrained by a shortage of the necessary chemicals, swabs and testing facilities. This issue has been subject to much criticism, but is being addressed with a target of increasing testing capacity from 10,000 to 100,000 a day by the end of the month. If the UK is able to delay the peak, the NHS may be better prepared to cope with the inevitable influx of patients. 

President Trump appears to have now accepted that this situation is not going to be over by Easter, and is introducing additional social distancing measures. The emerging star of the crisis appears to be Andrew Cuomo, Governor of New York, who gives an informative daily briefing that clearly gives the facts, explains the projections, what the needs are and advises what is being done to counter the virus. 

Fiscal and monetary action 

After much bickering amongst US politicians, the $2 trillion package was passed last week. They are ready to do more and there is now talk of a possible further $600 billion of aid, targeted at particularly hard hit industries. President Trump has suggested a further $2 billion in infrastructure spending tied to this. Yet again, this is muddling the coronavirus response with an unrelated political agenda. 

On both sides of the Atlantic, the questions about fiscal and monetary aid have focused primarily on the delivery
of the package, in particular the speed with which it can be achieved, rather than the size. In the UK, there were questions raised about high interest rates being charged by banks on loans with 80% government backing, as much as 30% in some cases, and certain applications requiring personal guarantees. Rishi Sunak has already acted to stop this happening. This is a new situation requiring novel solutions and the Government has had to think on its feet and is showing flexibility in adjusting rules to meet the situation. 

Other key market events 

Since the start of the year, the oil price has collapsed as a dispute between Saudi Arabia and Russia led to Saudi increasing production. This was in the face of declining demand as a result of the coronavirus shut down in economies around the globe. Yesterday, President Trump tweeted that he had spoken to the Crown Prince of Saudi Arabia and they could cut production by 10 million barrels a day or more, and the oil price spiked up nearly 25% at one point. It has subsequently settled back, giving up about half of that gain. There was some scepticism about the message. This morning it has been announced that OPEC will have an unscheduled virtual meeting on Monday next week. Oil companies will be hoping that this time they agree a cut in production. We will watch this closely while continuing to focus on the wider impact of the coronavirus. 

Brexit has all but disappeared from the headlines with no face-to-face meetings. With both Boris Johnson and Michel Barnier having tested positive for coronavirus, negotiating a trade deal by the end of June seems even more unlikely. An extension to the transition period, however unpalatable to the Brexiteers, seems inevitable. This is enshrined in law so will need an amendment to the Brexit bill when Parliament returns. 

Macro update 

“The economic impact is beginning to be felt at home, with 3.2 million new jobless claims in the US last week and 6.6 million this week.” 

Jonathan Marriott, LGT Vestra Chief Investment Officer 

Aid appears to have come too late for these people and we expect the number will be high again next week. In the UK, the Government acted early to protect employment but was slower to help the self-employed. Domestically, nearly a million people have registered for universal credit. Other survey data is reflecting the closing down of daily activity. With large parts of the global economy effectively shut down, economic numbers will undoubtedly be bad for some time to come. Some economic indicators may become hard to calculate. Inflation measures such as the Retail Price Index are made using surveys of prices in shops and online. These include the cost of air travel and eating out, which are more or less suspended at present. 

The aim of government and central bank policy is to make sure we have a functioning economy when we come out the other side of the present crisis. It has become clear that government aid in both the UK and US comes with strings attached. This is a proactive measure to ensure that government money is used to support employment and financial liquidity, rather than payments to shareholders. This week, the Bank of England ordered banks to stop paying dividends and cut bonuses for senior management. Companies accepting aid from the Government will not be able to buy back shares or pay dividends. The UK equity market has traditionally been a high yielding market relative to other countries. Many companies have already announced dividend cuts and while the historic yield on the FTSE 100 is close to 6%, the forward-looking dividend yield will be much lower. There is a futures market in FTSE 100 dividends that tends to have little liquidity and can be distorted by technical factors, but is indicating the yield may fall to as low as 2.5%. A slightly smaller but still substantial cut in dividend yield is indicated for the US and European equity markets. In the US, cuts in share buy backs will have a greater impact. However, if this is already the market expectation, then the impact of actual dividend cuts may be reduced. This may make managing portfolios with yield targets harder. This could result in some managers increasing higher yielding bond exposure. 

Summary 

The impact of COVID-19 is paramount and we expect to see very poor economic and company earnings reports in the weeks to come. However, government and central bank response has been enormous. Companies with strong balance sheets and quality businesses will come through this and be better positioned to perform well once we start to see a recovery. How long the present crisis lasts and how bad it will get are hard to predict. For now, the corporate bond market has recovered some of its losses, but still looks relatively attractive on a risk-return basis. In both equity and bond markets we continue to recommend a selective approach. 

LGT Vestra LLP 

14 Cornhill, London, EC3V 3NR
Phone +44 (0)20 3207 8000, info@lgtvestra.com 

www.lgtvestra.com 

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