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The bigger picture

11/05/2020 … Author:

2019 had been a good year for investors, with the FTSE 100 (measuring the 100 biggest companies listed in the UK) rising by over 12% and the S&P 500 (the top 500 companies in the US) doing even better in dollar terms, rising nearly 29%, driven by strong growth in the share prices of technology companies. Whilst returns like these were not generally predicted again for 2020, at the start of the year the outlook from commentators was fairly benign, with the end of the market cycle not expected by most until 2021 at the earliest.

The spread of the Coronavirus quickly became the hot topic in the news however, and the steps that would need to be taken globally to slow it down dominated. The first insight we had were the steps taken in China, the source of the outbreak, where whole cities were quickly locked down. Whilst seen as too draconian for most western countries, the scale of the task in hand started to be seen and the knock-on effects this would have on economies began to be appreciated.

Markets never like uncertainty but, without any clear plan from western governments, initially uncertainty was all they had, and this can be seen clearly in the following chart, where the gentle start to the year gave way to incredibly sharp falls towards the end of February and into March.

By the 23rd of March the FTSE 100 was down nearly 34% from the start of the year. It was at this point that the social distancing measures were announced in the UK and as can be seen this led to a bounce in the markets. By the end of March, just one week later, the FTSE 100 had risen from this low by 13.58%.

So where do things go from here? The truth is nobody really knows. This is certainly something none of us have ever seen the like of before. Within a week, businesses across the board were either adjusting to having staff working from home or facing the prospect of having their income dry up completely as they were no longer able to operate. Governments, both here and in other developed economies, were quick to step in with the announcement of support packages such as the employee retention scheme here in the UK. Whilst seemingly easier to announce than implement, this clear guidance did however provide businesses with a lifeline and provide some comfort to those who were otherwise looking at being made redundant at what is already an extremely stressful time.

As with the phrase “can’t see the wood for the trees”, at present there is so much uncertainty and daily ‘noise’ that it is easy to get distracted and not be able to see the bigger picture, especially when the path through the wood changes regularly. What we need to do is pull back our focus, so instead of looking at the trees around us we can instead look down upon the whole wood, and then apply what we have learnt over the years.

When investing everyone accepts that you need to start with at least a five-year time frame. If decisions are made on a day-to-day basis dependent upon the latest news then that is speculating not investing and is so easy to get wrong. So, when we are analysing funds and meeting with fund managers we are looking for those which have a robust process and proven track record in choosing the businesses that have strong balance sheets and are capable of growing over the long term.

Whilst the long term effect on most sectors and industries is still unknown and some may take years to recover fully, if you invested in the strongest companies before the pandemic, or any other random event that may occur, then you have invested in the companies that are most likely to be able to survive the crisis and come out the other side. It is the weaker companies who were already struggling that will go first and we have sadly seen this already with casualties such as FlyBe and Debenhams. How many more will go the same way as the lock-down continues remains to be seen, but the strongest will survive.

Another lesson we have learnt from the past is that one of the worst things an investor can do is panic when their investments fall in value and cash them all in. It is better to remember that we are investing with a long-term view. Anyone who sold out on the 23rd March would have missed their investments growing by over 13% in the next seven days. If an investor is not comfortable with the possibility of sharp falls in the short-term, then they should position their portfolio accordingly from the outset, providing diversification by using a broad mix of assets such as bonds and commercial property (noted in the ‘Commerical Property Funds’ section) as well as investing in equities. This is the approach we have always taken at Lowes, and whilst it will not stop all losses it should hopefully have provided some protection from the falls seen in the major stock markets to those without the ability to accept such declines.

A final thing to remember is that this will eventually pass. Of course, every loss of life is a tragedy for the person concerned, their family and friends, and I don’t want to belittle that at all. But there will come a point when the pandemic passes, life starts to return to normal and ultimately a vaccine is discovered. Putting a timescale on that would be speculation at best, but I would be confident to say it is within most people’s investment time frame.

It may be the case that we have not seen the bottom yet in terms of investment markets and further falls could come from here. One thing that we can learn from history though, is that when investment markets fall due to an external event such as this, rather than a systemic event such as the financial crisis of 2008, or a cyclical event such as inflation or interest rate rises, then the fall tends to happen quicker and the recovery tends to be quicker too, as shown by the charts at the top of the page, from Goldman Sachs.

This will likely be helped by the support packages introduced by the governments around the world. Schemes such as the employee retention scheme mean that when restrictions are

eventually lifted people will be able to return to work immediately. Few skill sets will have been lost, little new recruitment will be needed and no machinery will have to be bought, so businesses will no doubt be looking to make up for lost time as quickly as possible. At that point, the recovery for a number of sectors could be quick and strong.

So remember that with the lessons learnt from the past, despite the uncertainty we have hopefully positioned your investment portfolios to achieve your long term goals, so in the short term you can focus on what is truly important – staying safe and healthy.

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