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Toby Birch Toby Birch 11th May 2020

Recovery first; inflation may follow

We finished our previous update with the advice to ‘sit tight’ rather than make for the exit, in spite of the disturbing headlines at the time. Although new cases of the infection have mercifully ground to a halt in Guernsey the virus continues its inevitable cycle elsewhere. While everyone is now well-versed on viral curves, we emphasised back in March that the trend would de-escalate and drop and that stock markets would focus on second-guessing the peak in their respective regions.

This has since come to pass and as expected, shares have rallied strongly in spite of the negative headlines. While investment behaviour is driven by sentiment it is not sentimental. In other words, financial markets may appear to be ruthless by rising amidst human anxiety but they are ultimately logical. The crash reflected the reality of the current economic crunch but the rally is now forecasting a future recovery. What form this takes is yet to be seen but the fast action of governments and central banks appears to have a averted a needless slump.

In the meantime unemployment has surged, especially in the USA where the jobless rate recently came close to 15% (some 33 million Americans have lost their job during the pandemic). While this is a long way from the 25% figure seen in the Great Depression, the number affected is similar given that the population has doubled in the intervening generations. Back then a significant contributor was the dust-bowl destruction of farmland which had a much greater impact, given the high proportion of people working in agriculture at the time. Fortunately with a service-based economy the ability to re-start is much more flexible. Nevertheless many individuals and entrepreneurs have been stripped of their savings in the interim, assuming they had any liquidity in the first place. 

The only comparable financial model we can reference for a similar pandemic is the Spanish flu of 1918. Back then we saw the market drop by a third then stage a gradual recovery over the space of 18 months. This time around we have seen similar patterns in share prices but the entire cycle has been compressed into barely 3 months. While this should be taken as a positive it should not be assumed that economies will magically revert to normal, or that markets will return to the record highs set back in February. Any gains from here should be viewed as a bonus and for many investors aiming to break-even would seem a sensible goal for the remainder of 2020.

As ever one should be on the look-out for the next battle and that will be inflation. While some will be short-term based on supply/demand imbalances there is also a structural angle of more localised production which will come at a price. There is likewise the threat of currency devaluations based on the diluting effect of debt but we will factor these themes into future strategies. As ever we are here for any queries you may have. 


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