Further to Money Minder’s previous article about Coronavirus and its potential impact on the global economy, (written by our MD, Ray Black MSc FPFS at end February) this article considers the response we have seen from global leaders so far and what effect it might have on your cash and investments.
There is no doubt that Coronavirus has attracted a huge amount of attention, all over the World. Understandably, very little of that attention is of a positive nature. However, if investors make the wrong decisions with their money at this point in the economic cycle, it could take them a very long time to recover.
In this latest instalment of specialist articles on Coronavirus and its potential impact on the global economy, we hope to help our readers to understand why Governments and central banks around the world are reacting the way they are, and what it may mean for their wealth over the medium to long term.
This article does not attempt to tackle the potentially devastating human impact of the virus, nor do we wish to trivialise it in any way. For anyone who has already been or may in the future be affected by the virus we send our best wishes to you, your friends and your family.
What are Governments and Central Banks doing and why are they doing it?
Most people understand that these days, Governments around the world will often spend all of the money they receive in taxes from their country’s tax residents and businesses. If they want to spend more than that, they’ll have to borrow. In years gone by, the amount they borrowed would have been aligned to the value of nations owned assets, like gold for example.
Over the last 20 years, the way Governments and central banks handle economic problems like recessions and stock market crashes has evolved significantly. Lower interest rates and Quantitative Easing, (a term first coined by The Bank of Japan in the early 2000’s – also known as ‘QE’) have featured heavily in what is now known as ‘Modern Monetary Theory’ or MMT.
The basic principle of MMT is that Governments and central banks are in control of the supply of money and together they can stimulate their domestic economy by creating more money and in turn more demand for goods and services. Furthermore, by working together, this powerful duo can potentially link money creation with job creation.
The UK’s most recent budget, (delivered by our new and very wealthy chancellor Rishi Sunak) is an example of Modern Monetary Theory. He pledged £30bn to help "British people, British jobs and British businesses". He also promised to protect the UK economy against the coronavirus outbreak in what he said was the largest financial boost to the UK in 30 years. He said austerity had ended and that over the next year, we would see the largest increase in departmental spending for 15 years.
He also announced a £5bn emergency response fund to support the NHS and other public services in England and a further £600bn to be spent on roads, rail, broadband and housing by the middle of 2025.
Taxes were both frozen and scrapped and it seems clear to me that Government have the full support of the Bank of England, who will inevitably be the provider / lender of the money they intend to invest in to the UK’s economy.
Lower interest rates for borrowers (loose monetary policy) coupled with lower taxes and spending more than the amount raised in taxes (loose fiscal policy) is potentially, a very powerful stimulant for the UK’s financial situation that is likely to come with some serious financial consequences, especially if its overdone.
What are the potential outcomes of loose monetary and fiscal policy?
If fiscal and monetary policies are used together it can help to restore an ailing economy, most recently, the credit crunch years. For example, if an economy is experiencing a recession, one possible solution is to increase the supply of money, which, if then invested in infrastructure, goods and services, (i.e. building more hospitals, houses, roads, rail networks and / or providing more jobs for nurses, the emergency services and builders) it help to direct investment to wear the Government feel it is most needed.
When central banks provide stimulus, it’s known as expansionary monetary policy.
If used in conjunction with Government spending and reductions in taxes to give the local economy a boost, it can potentially spur higher levels of inflation. This may be more likely if that economy has a low unemployment rate. In December 2019, the UK employment rate was estimated at a record high of 76.5% (source: ONS).
What should investors consider stocking up on?
Whilst the companies that produce toilet rolls and hand sanitisers may be facing unprecedented demand for their products at present, I will not be suggesting more panic buying of items like this. However, what is always important to remember in times like this is that supply and demand is the underpinning foundation of all transactions.
All over the world, money is being made available and described as ‘Coronavirus Stimulus Packages’. Large chunks of this money will be provided / printed using QE (and similar) programs. The digital money that is effectively being created out of thin air and then lent to business owners and Governments at the lowest rates in history will then be spent on infrastructure and jobs or invested in companies.
In due course, you can expect to see this stimulus work its way through to higher share values and higher wages, (due to the extra demand for workers but low unemployment rates). Governments around the world will want to see their populations spending money as its consumerism that keeps the global economy moving forward. The more we spend, (demand) the more companies need to provide for us (supply).
Whilst my last sentence may appear to over simplify things, I do believe that sometimes, it can be really helpful just to keep things simple. As I mentioned in my previous article on Coronavirus and its potential impact on the global economy, global demand is still present and we keep getting told that this pandemic is temporary, it will pass. However, the amount of money that is being thrown in to the global economy at present is mind boggling. That amount of investment cannot be made without it having some serious consequences.
Shares look very cheap at present, especially in the UK where the markets have been struggling with the uncertainty of how our Brexit decision almost 4 years ago would pan out. Things may get a bit worse before they get better (especially from an interaction with others and day to day lifestyle point of view). However, I’m not alone in the opinion that share prices and potentially the cost of living may rise significantly as a result of all the previous and current stimulus packages put in place.
For those readers with the appropriate risk attitude, 2020 could a buying opportunity to rival 2016, 2009 and 2003. For medium risk investors, the UK stock market looks really good value right now. For those that are happy to invest some of their money in higher risk funds, Asia Pacific and Far Eastern Funds, Emerging Markets and even Japan feel like good long-term propositions at present. Whilst I’m not so confident on the short term outlook for North America or Europe (don’t get me wrong, I’m not suggesting selling existing holdings, just that they don’t look as good value as other areas to me), Commodity based funds that hold a high level of Oil, Gas and mining company shares are also cheap. However, funds that invest in commodity orientated companies are also the most volatile in our portfolios and care needs to be taken not to over expose a portfolio to the higher levels of volatility that come with them.
Overall, my message in this article for our readers is, as you would expect, don’t panic.
Even if you have never come across the term before today, hopefully, you will now have a reasonable understanding of how expansionary monetary policy works and how, since the credit crunch, it has been employed to tackle economic problems all over the world. Right now, I believe that our global economy is so interlinked that Governments and central bankers all around the world will do, as Rishi Sunak said in his recent budget speech the UK would do for everyone here, which was: “everything we can to keep this country, and our people, healthy and financially secure.”
And if the situation worsens, I also have faith in those powerful global leaders to throw even more money at the problem. Which in turn, will drive share prices and the cost of living higher. A future concern might actually become apparent if too much money is invested in the global economy and the result is a huge increase in the cost of living and very high inflation. Inflation is a risk that should not be underestimated, especially for anyone investing in cash accounts. In March, the RPI inflation in the UK stood at 2.7% (source: ONS)
One specific place that it’s not good to be invested in when a huge amount of digital money is being printed, (especially if it is then invested to the economy via Government spending) is cash. When interest rates are low and there is new money being created by central banks, the value of cash goes down and the cost of living rises. As mentioned above, that’s especially true if the new money is being pumped in to infrastructure projects and jobs which keeps consumers spending and the demand for goods and services high.
Whilst emotionally speaking there are likely to be some difficult times ahead for many of us, and I do not wish to come across as dismissive about the impact this may have on our lives, our families and our friends, my job today is to discuss the economic impact of coronavirus.
Therefore, economically speaking, I believe we are living in quite remarkable times. Potentially, I think we are very close to the start of a huge boost in global economic output that will last for some years. I also believe that there will be huge gains to be made for those invested in the right areas and that growth will definitely not be limited to just the food delivery companies and the manufacturers of day to day household items that are currently being stock piled by concerned citizens all over the world. Whilst some companies will undoubtedly suffer in the short term (the leisure industry immediately springs to mind) others will adapt and innovate their systems and processes to cope with the challenge. Some of that innovation will lead to long term changes in the way those companies provide goods and services to their customers which will provide them with future prosperity and efficiencies that they hadn’t even considered possible prior to the coronavirus outbreak.
Ray is Money Minder’s Managing Director and Chairman of the company’s investment committee. He provides guidance to the in-house research team and recommendations on strategic asset allocation and tactical investment strategies for Money Minders investment clients. He is a Chartered Financial Planner and holds the Advanced Diploma and the highly respected and rarely achieved Masters Degree in Financial Planning. He is a fellow of the Personal Finance Society and a Society of Later Life (SOLLA) accredited adviser holding professional qualifications in discretionary investment management and higher level investment planning, retirement planning, corporate financial planning, taxation and trust matters. Ray is frequently asked to provide comment on financial issues for the national financial press and UK based financial planning subscription magazines. He has been a regular contributor to BBC Radio broadcasts and frequently presents retirement planning, investment planning and long term care planning workshops to public sector workers.