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Diary of a Fund Manager - Mirror Mirror- 06.04.20

Big events and small matter during times of change. Both feature in this week’s Diary. People and businesses are adjusting to the new reality with financial markets providing the mirror that allows us to see ourselves.

Strange to report, but a few green shoots of normality made tentative appearances last week. Politicians restarted the blame game, equities fell back by modest amounts whilst bonds rallied, the dollar strengthened and gold drifted lower. The UK tax year ended on its uniquely obscure date with the usual flurry of ISA subscriptions and last minute tax planning. Only April Fools’ Day refused to cooperate by not making an appearance this year, but otherwise routines are starting to emerge.

That’s as maybe but make no mistake, this crisis is far from over. On the infection front we are still waiting for the Italian curve to flatten let alone follow the Chinese decline. Of particular worry, the US is now the epicentre of Covid-19. A late response by the government and lack of coordination between states is having consequences. Government support was the story, but now it’s all about implementation. Some countries will be better than others. The cheque in the post won’t help those without jobs or savings.

Surveying the flood of information that continues to cascade into my inbox, certain patterns are clear. Those who analyse economies are doing an excellent job recording the extent of the decline on economic growth and the parabolic increase in unemployment, but when it comes to what next their forecasts are less useful. Some predict a rapid recovery in the second half of the year and others don’t. Neither camp has access to superior tea leaves.

Moving on to companies, the news flow is more informative. In the retail sector tenants and landlords are in polite conflict. Agreements are being shredded by the tenants as they suggest innovative ways of paying or not paying the rent. Footfall numbers are, of course, in freefall.

Technology companies are exhibiting selective resilience with the ‘FAANGS’ – Facebook, Amazon, Apple, Netflix and Google – outperforming just as they did before the virus. US computer game turnover is up 60% and in the UK our preferred distractions in terms of gaming are either warfare or football. The damage done to the physical leisure companies is clear to all as we stay at home. Cruise ship owner Carnival came to the market last week to raise funds, but had to pay 12% to gather the $4 billion required. Interestingly, there were plenty of willing buyers at this level, although enthusiasm for the accompanying share issue was much more muted.

The medical equipment manufacturers and pharmaceutical companies are very much the centre of attention. Ventilators command ‘tulip’ prices as industry struggles to re-tool to meet the explosion in demand. Those developing vaccines are making steady progress and some are getting close to the trial stage. Miracles need not apply. That British American Tobacco has a US bioscience subsidiary that is making good progress in this area raised a wry eyebrow and had some wondering if April Fools’ really had arrived. If it succeeds in developing an effective ‘cure’ will those with ethical concerns be prepared to forgive previous transgressions? In a war strange alliances emerge.

The price of a barrel of oil increased by nearly 25% in a day when President Trump declared that Saudi Arabia and Russia were close to agreeing a production cut. In reality it is lack of demand that is now the problem, not excess supply. The Russian economy is still in trouble, US shale producers are losing money and the Saudi currency peg is under threat. On the subject of fossil fuel consumption, investors are now tracking Chinese air pollution in order to judge the strength of the economic recovery. Levels are above last month, but still way below normal. Yet another change of priority in our altered world.

The UK equity market reflects all of this with winners and losers emerging on a case by case basis. Good management, solid balance sheets and sector are a good place to start, although even then it’s a struggle. Faltering supply chains and ensuring a safe work environment for staff are daily challenges. On top of this governments and regulators around the world are interfering implicitly or explicitly in the dividend decision process. Many companies will not be paying shareholders for the use of their capital for now. As ever, a good headline will have unintended consequences, but for now shareholders seem prepared to look through this interruption to their cash flow.

Longer term companies will need to raise funds to rebuild. For many years debt issued at low rates of interest or straightforward bank loans have been the preferred route. This remains the case for now, but further out I suspect that equity, public or private, will become more important. Investing in shares is an acceptance of risk, and there is certainly plenty of that around at the moment, whereas bond investors like certainty of income and capital return. With paper money being printed at an extraordinary rate, it is growth that will be in short supply when we reach the other side. Investors will, entirely reasonably given the risks involved, demand their ‘pound of flesh’.

Next week’s Diary will be on Tuesday. Wishing all a Happy Easter.

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