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Coronavirus Economic Update - Extended lock-down periods and their potential consequences for the global economy, stock markets and your investments

Coronavirus Economic Update - Extended lock-down periods and their potential consequences for the global economy, stock markets and your investments

Tuesday, 14 April 2020 -

Ray Black, Money Minder's MD and chairman of the in-house investment committee considers the consequences of extended Coronavirus lockdown periods and their potential effect on the global economy, stock markets and your investment / pension portfolios.

Coronavirus continues to dominate news headlines across the globe. Some countries, (like Spain and Italy) have started to tentatively lift their lockdown restrictions. Others, (like the UK) are enforcing them for longer as they wait for what they think is the ‘peak infection’ date to pass before they will consider relaxing the rules on freedom of movement and social interaction.

In this latest instalment of specialist articles on Coronavirus and its potential impact on the global economy, we look at what affect the creation of billions of pounds/euros/dollars has had on global stock markets so far, some of the companies that have been benefiting from global lockdown, some that have been virtually unaffected and what the future may hold in store for investors.

I would like to point out once again that this article does not attempt to tackle the 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 affect has the creation billions of pounds/euros/dollars via monetary stimulus had on stock markets so far?

As discussed in my previous coronavirus article, in recent decades, Governments and central banks  have tended to tackle economic problems like recessions and stock market crashes by lowering interest rates and printing ‘digital’ money via Quantitative Easing, (QE). The basic principles of a country’s ability to manipulate its sovereign currency in this way is referred to as ‘Modern Monetary Theory’ or Expansionary Monetary Policy.  

Even before the new money has been created, Governments can turbo charge an economy by using ‘fiscal policy’ in order to choose where to invest it, for example, the NHS, Transport, Infrastructure Development (see Rishi Sunak’s recent UK budget spending spree) or, in the case of the Covid-19 lockdown measures, supporting UK businesses and their employees.

Since the stock market lows that occurred around 23rd March 2020 throughout the world, values are now up by around 15% to 20%. In the US, (where literally trillions of dollars of financial stimulus has been promised) at the close of business on Monday 13 April 2020, in just 15 trading days, the Dow Jones has grown in value by over 25%!

After reading the last paragraph, many readers will now be asking “can this continue”? In short, the answer is that for as long as Governments and Central Bankers are prepared to put their money where their mouth is, yes, I believe it can.

I fully appreciate that to those of us brought up in the financially sound principles of “you shouldn’t spend more than what you’ve got coming in each month”, the idea of Governments all over the world taking their individual countries even further in to long term debt sounds terrible. However, they are playing by a different set of rules and as we have seen, between them, Governments literally have a forest of money trees to call on as and when they need to. Furthermore, considering the alternative, who an earth is going to try to stop their leaders harvesting them!  

For completeness, and just for a moment, let’s consider the alternative.

If Central Bankers were prevented from creating new money and lowering interest rates, and Governments were prevented from raising their national debt levels to invest in the ways described above, they would not be able to provide the huge levels of financial support they currently are. In turn, whilst some companies would survive, many would go bust. In addition, many more employees would lose their jobs and become unable to service debts on their mortgages, credit cards, car loans and HP payments that are a fact of life for many households in the modern world of family finances.

This alternative option sounds just terrible to anyone considering it and it certainly won’t win any future votes for the Government that allows it to happen. If that were the outcome of this Global Pandemic, newly elected Governments would still have to sort the mess out afterwards and what is likely to be the solution at the top of their list? Yup, you’ve got it…creating money out of thin air and investing it in to ailing companies and national organisations!

What effect has the lockdown had on companies so far and will the extended lockdown cause further financial problems?

Its only fair to say that there are many companies in the UK that are really suffering at present, especially those connected to the leisure and travel industry. My hopes and best wishes for brighter times ahead go out to them and their employees and I hope that they have been able to weather the storm whilst awaiting access to the Governments support packages and ‘Furlough’ funding.

However, there are also some companies doing very well out of the lockdown.

Most people are aware of the huge boost in the use of technology that is allowing employees to work from home that is driving share values in video conferencing and cloud-based businesses higher. In addition, the share price growth in online food delivery companies like Ocado (up 35% since 12 March 20) who recently had to stop taking on new clients due to capacity concerns has been very impressive. I have recently read about online bicycle and exercise / fitness equipment companies in the UK having trouble keeping up with demand and a Table Tennis Table distributor selling 124 full size tables in less than a week! In recent weeks, the same chap has also sold 250 of the 500 pool tables he had in stock.

There has also been a surge in demand for home and garden goods with some seed companies having to put new orders on hold whilst they catch up with the outstanding ones. There has also been an increase in the sales of home working and home entertainment goods (laptops, printers, TVs, gaming consoles) and after all the stock piling of food, suppliers of fridges, freezers and kitchen appliances have been in undated with new orders. In March, Dixons Carphone reported store sales were up 23%.

Whilst considering the production of electrical items, technology has moved on so far now that there are electrical component building factories (i.e. printed circuit board and silicon chip manufacturing businesses) all across the world that have very little need for human interaction. They have been able to continue to produce goods right the way through the lockdown period because they don’t use humans in the manufacturing process. That’s because the components are so tiny that human eyes can't see them properly and human fingers don’t have the level of dexterity required to produce them. For these factories, there has been little or no loss in production. Yet, just like many other companies, in recent times their share prices have dropped in value because of the downward pressure that Covid-19 has inflicted on stock markets.

What might the future hold for stock markets and investors?

Stock Markets dislike uncertainty and are very good at factoring the potential problems of the future in to current prices. The very fast and significant reductions in share prices in late February and March took place because of both of these issues interacting with each other to brew up an almost perfect storm. However, one thing that I think we can be relatively certain of in these trying times is Government and Central Bank intervention. The worse things get, the more we can expect those institutions to delve deeper in to the forest to search for even bigger money trees.   

All over the world, more money is being made available to suffering economies, which, as we have seen over the last few weeks has already started to provide higher share price values, even though there has only been a decrease in economic activity and that is unlikely to change in the short term.  

In the UK, the demand for goods and services remains, especially whilst ‘furloughed’ employees are still getting paid 80% of their wages. Globally, it is likely to increase once the lockdown restrictions have been lifted. We are already seeing the ‘green shoots’ of recovery in those countries that believe they have gone past their ‘peak infection’ phase and the UK hopes to be in the same situation within the next few weeks.

The pandemic is temporary, it will pass. The latest publicised expectation on when the world might have a vaccine ready to distribute is this autumn. My suspicion is that it will actually be sooner than that. We cannot underestimate the amount of recent experience, money and intelligent resources that are being invested in to the creation and distribution of a vaccine.    

Once Covid-19 is under control, some things will stay the same. Some companies will choose to allow some of their employees to work from home for part of the working week. There will be more video conferencing appointments, more people using online banking and more people choosing to shop online. Will Amazon be able to retain the 100,000 new employees it has taken on over the past few weeks? Probably.

However, some things will change. Hopefully, people won’t take their local Pubs and Restaurants for granted in the future. Those establishments that have managed to survive the shutdown can expect some very busy nights later on in the year, once the general public are able to move around freely once again and they feel confident enough to go out and let their hair down.

There are also those people that will be itching to get away from home for a while, on holiday. I expect borders to be tighter and international travel to include more restrictions, however, planes will fly again and hotels will be open for business all over the world.

Global demand for goods and services will increase, the world will start to go back to normal and profits and share prices will rise. Even if it’s a slow start, more money will be made available to the masses if its needed and the cost of living is likely to rise. Dependent on how much free money is distributed over the next few months, the cost of living may rise significantly over the next few years, however, for now, inflation looks manageable for most of the major economies of the world like the US, Asia, Europe and the UK.

As mentioned in previous articles, for those readers with the appropriate risk attitude, 2020 and even 2021, may well end up being recorded as a good buying opportunity to rival 2016, 2009 and 2003. The UK stock market still looks really good value and indicators also suggest that commodity funds (investing in precious metals, infrastructure metals, oil, gas and agricultural resources) could also start to move higher in value over the next few years. However, funds that invest in commodity orientated companies can be very volatile in price and are not recommended for faint hearted or cautious investors.

For readers that are already invested and possibly nursing paper losses at this time, my overriding message in this article is, as you would expect, don’t panic.

At present, Governments and central bankers around the world are proving that they will do whatever it takes to keep their economy’s moving forward. If things get worse, I have faith in those powerful global leaders to go in search of the money trees. In turn, that is likely to drive share prices (and in time, the cost of living) higher.

The last place you’ll want to be invested in on the other side of this crisis is cash funds. When interest rates are so low and vast sums of liquidity are being provided by Central Bankers’ cash will not keep up with inflation. This is especially true if it is then invested in to the economy via Government spending, (once again, see Rishi Sunak’s recent UK budget spending spree)

Economically speaking, I believe this Pandemic has the ability to significantly change the global economic environment in which we live. Potentially, I think are close to the start of a substantial increase 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. In the short term, some companies may not survive and new ones will start up in their place. Other businesses will adapt, innovate and go from strength to strength by providing their customers with new products and services that were only ever pipe dreams 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.