DIARY OF A FUND MANAGER - CONNECTED ISOLATION- 26.05.20

In this week’s Diary a tour of the world from East to West with an undercurrent of optimism as we move from tentative reopening to the evidence of activity.

It was a good week for equity markets with all else calm enough. It is far too early to report that ‘Tranquillity Base’ has been established given the shock to the system and possibility of a second infection wave later in the year. Nonetheless, a cursory scan of the news flow shows the transition from shock to shut down and then to hesitant reopening has now moved to an analysis of what is happening as the global economy stutters back to life. At heart we seem to be optimists where a little bit of good news goes a long way.

Starting on the other side of the world with New Zealand which is open, but changed. Customers of restaurants and cafes need to be signed up to the government tracing app and once inside all manner of separation and sanitisation is required before any sort of sustenance gets close to being consumed. Factories have been reconfigured to allow for two metre separation rules, whilst home visits from plumbers require householders to complete a long questionnaire before that leaking taps gets looked at. Courier businesses are booming, but the tourist industry is dead in the water. The hard lockdown limited deaths to only 21, but how the economy is going to function under this reopening regime is an entirely different matter. Small businesses that are not internet-based are in real trouble.

China is getting on with the future despite a deluge of rhetoric from Washington. Infrastructure projects from 5G to high speed rail links are being prioritised along with job creation. Boosting domestic demand matters when exports are likely to remain down for some time. Events in Hong Kong are not entirely unexpected given that the attention of the world, and the US in particular, is elsewhere. Moving on to India, it is too early to say whether policy implementation will be effective and deliver good news, but what we do know is that foreign capital is flowing in at a fair lick. Reliance Jio, a telecom company, has attracted multi-billion dollar investments from Facebook and private equity group KKR in recent weeks.

Europe also managed to deliver good news last week. It may be early days, but the Franco-German plan to allow the European Commission to raise €500 billion all on its own and without the participation of individual member countries is a complete break from the past. Let’s see if it gets done, but if it does then this could be the shape of things to come. At a more mundane level German GDP is recovering although still 10% below the pre-crisis level with measures such as lorry tolls and Apple mobility statistics moving higher on a sustained basis.

Undeterred by Dominic Cummings’ road trip, the government borrowed £3.8 billion for three years at a rate of interest fractionally below zero, Carlsberg merged with Marstons greatly to the relief of investors in the latter, whilst Compass raised £2 billion by issuing shares at about half the level prevailing at the start of the year.

Dividend cuts continue to occupy the headlines and undoubtedly the reduction in income is being felt, but many companies are still providing shareholders with valuable cash flow. Elsewhere, conversations with students and academics were enlightening. Summer intern posts and post-graduation jobs are being cancelled at an alarming rate, whilst Cambridge has announced that there will be no mass lectures at all in the next academic year. All will be online, although smaller teaching groups will continue to meet face to face. Feedback from those looking in on the UK from the outside is uncomfortable given the infection curve and the possibility of a hard Brexit. Splendid isolation may well have advantages in the post-virus world, but at the moment comes at a price.

Ignoring the political drama that can only intensify as the November presidential election approaches, the US is doing what it does best: getting on with the present rather than bothering too much about the past or any grand plans for the future. So far twenty five states have reopened and road traffic is back to 50% of normal. That Hertz filed for bankruptcy last Friday could be the shape of things to come with restructuring experts anticipating a busy few years.

One to one telephone calls have been part of our daily lives for a hundred years or more, but one to ten meetings, let alone one to many have remained face to face. Not anymore. Steadily we are getting used to conference calls whether audio, which avoids the need to look smart, or video. Feedback is harder to gather than when all are in the same room, but possible. Presenting ideas to larger audiences is, however, like talking into a void, no murmurs of agreement, no yawns visible in the backrow and no prompts to ‘cut to the chase’ as the exit doors start to see heavy use. Time is of the essence as is precision of language.

The new world is indeed a rich tapestry of interlocking parts, both large and small. Although we can try to call forth the past to guide us, we cannot make it answer. Only the bright light of the present provides any real illumination.

Written by

David Miller
Investment Director

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