DIARY OF A FUND MANAGER - BACK AND FORTH- 11.05.20
In this week’s Diary, a quick look at a few of the cracks appearing in the façade of the global economy, thoughts on the staged recapitalisation of business and an update on investment management using artificial intelligence.
The base case for markets set out in last week’s Diary rolled on for a few more days with equities ending higher and bonds slightly lower. Elsewhere, currency markets were relatively quiet, gold unchanged and oil better. There are too many cracks appearing in the global economy to list all of them, but a few of note include the German courts disagreeing with the legality of the ECB support operation, the impending Argentinian default and the sheer scale of the decline in US employment where in April 20.5 million fewer Americans had a job than in March; an unemployment rate of 14.7%. Approximately half of these losses were in just three sectors, leisure, retail and transport. Interestingly, manufacturing did better than expected despite the lockdown. The indebted, no profit, game changers like Uber and Airbnb are cutting jobs along with the rest.
It was a four day week in the UK providing even more pause for reflection than in the new normal of remote working. That is if you are fortunate enough to have a job. Along with everywhere else in the world, the UK economy is on its uppers with April car sales down to 1946 levels. The question now is what will the recovery look like when it eventually starts?
The declining importance of UK manufacturing has been a cause for concern for many years, but the strength of the service sector more than made up for this relative decline. Pre-crisis about 20% of GDP came from manufacturing which compares unfavourably with 30% in Germany and Japan and 40% in China. People mattered more than machines when it came to generating UK economic growth. The unknown now is how many of these service sector jobs will return and when as we restart our changed world.
The detail of investment remains relatively safe compared to attempts to see the future using big picture statistics. The company results season continues without any real surprises. The winners get more expensive and the losers cheaper. Interrupted supply chains remain a daily challenge for all management teams and that is before the end-user comes into view.
The need for new capital beyond the support offered by governments is clear. Bond markets are obliging at a price, but eventually it will be shareholders who will decide which companies deserve to survive. Talk of rescue rights issues is starting to appear. The recession of the late 1980s was accompanied by significantly higher interest rates and was therefore painful for homeowners and businesses alike. Several companies that went on to dominate the performance tables during the subsequent decade had to come to the market several times for more money during the healing phase. They were only really worth buying when the management teams had cleared the decks of past mistakes and had a plan for the future. WPP and Asda spring to mind.