DIARY OF A FUND MANAGER - BABY STEPS- 20.04.20

In the week’s Diary the link between infection rates and attempts to restart the global economy, some general economics, a bit of politics and a few winners from the company results season. Also the observation that patience is the unsung hero of investment success.

In amongst everything virus related, financial markets had a fairly normal week. Equities were unchanged to a bit better as were bonds. Gold and oil went up and the US dollar drifted lower. Investors seemed more interested in plans to restart the global economy than the horror show of the actual economic numbers. Countries, companies and people swimming in a sea of debt are struggling to make ends meet, whilst those in a stronger position are hoping that they will be able to get through to the other side.

Setting aside President Trump’s attempts to blame everyone for everything, the restart is underway, although confidence about the outcome remains distinctly shaky. China went in first and is trying to be first out. Government spending on infrastructure and construction are easy wins, but domestic consumers remain cautious. For those looking further afield the exporters are suffering because of a lack of demand for their goods. Numbers emerging over the next few months will be monitored closely by all.

Less wealthy countries are struggling. Lockdowns may slow the spread of Covid-19, but no activity quickly leads to shortages of the basics of life. It is an unenviable balancing act, particularly where social distancing is impossible. Amongst the major economies there are some signs that the infection rate is at or close to a peak. Those who locked down early are coming out first, tentatively reducing restrictions and encouraging certain sectors to go back to work.

On the long journey of recovery some first steps have been taken. Let’s hope that it works, as secondary lockdowns will be hard to bear and most certainly aren’t in the price so far as markets are concerned. March economic numbers were dreadful and April will be worse. Attention is now turning to the lasting damage done by the events of this year and the actions taken to get the world through this crisis. As I wrote last week, the outcomes are many and the range wide.

Ordinary letters of the alphabet are now being used to describe the global economy, replacing the usual Greek-inspired lexicon of finance such as alpha, beta, gamma and the rest. Will we see a V-shaped recovery or a U- or W-shaped one? Worst of all will it be an L-shaped one, that is no recovery in the foreseeable future?

My best guess is that it will be a lazy W, with the recovery taking several years with setbacks along the way. Back to US films from the past, I seem to remember that the Lazy W cattle brand featured in The Big Country, a classic and very long Western of the 1950s, if you fancy a bit of good old fashioned Sturm und Drang. The serious point is that just for now images are easier to comprehend than the magnitude of the economic numbers as we grapple with the future.

The company results season is not to be forgotten. The quarterly numbers may only reflect a month of trouble, but they are interesting nonetheless as at the end of the day we invest in companies, not countries. Weak business models are being called to account, but the good are shining through. Consumer staples remain in demand with Johnson & Johnson announcing a 5% dividend increase. Amazon is reported to be hiring 175,000 people to meet increased demand while it is business as usual for semi-conductor manufacturers. The US banks are showing the strength of their balance sheets by making huge provisions to meet a potential explosion of bad debts. The reserves put in place since the credit crunch are now being put to work.

Investment management also has its unalterable elements as quarterly reports are dispatched and discussed. Sensible diversification has paid off with shards of light clearly apparent in amongst the general gloom. Government bonds, both conventional and index linked, gold and cash all played their part, but it was what wasn’t owned that mattered just as much. Complex financial instruments based on low volatility and good times forever have met their Waterloo. Portfolio construction aids patience and patience is an under-recognised element of long-term investment success.

Getting out is a bit of a problem at the moment, but the internet allows the world in. I can’t imagine what we would have done without it as there is a limit to how many telephone calls one can take in a day. Discussing markets on Resonance Radio was, however, a welcome ‘outing’. Platitudes and generalisations, which I try hard to avoid, carry even less weight when it is sound only, something that politicians standing behind lecterns should note.

Written by

David Miller
Investment Director

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