Goodness me, could the headlines get any scarier? The constant update of fresh coronavirus cases and new deaths, whilst informative, adds to the depressing atmosphere and exacerbates the panic. The daily political briefings are notable, not just for the necessary updates from the government but also for the constant emotive questioning by journalists clearly seeking to trip someone up for the sake of the next day’s scare story. We could really do with the emotion being toned down rather than ramped up but that’s the media for you.
As far as the stock markets are concerned, each attempt at a rally gets cut off in its infancy, against a background of similarly scary headlines yelling at us how many billions have been lost on the day, or the week or whatever. Then the papers rub salt in the wounds by letting us know the latest hedge fund manager to be having it off as his short positions suddenly bring home the bacon. The fact that he may have been short for the last five years is hardly worth a mention. Had to get it right some time.
So let’s try to take some of the emotion out of the situation and gain a rather more dispassionate take on things. Yes, those hedgies constantly running net short positions will have suddenly come into their own but I can remember a couple of years back they were showing some of the worst performances in the market. One of the main drivers of the downward lurch are the Exchange Traded Funds (ETFs), passive investment mediums which track the stock weightings in the indices they mirror. Their popularity over recent years has become massive but when their investors bail out the selling is automatic and across the board. Likewise, the algorithm traders, computer modelled dealing programmes, just keep going in one direction as the next trigger point is hit. The selling is quite indiscriminate and creates frightening price movements until the model has run its course.
When the first signs of the virus were breaking it seemed a local problem around Wuhan in China. It is the speed and voracity of its spread around the world that has been so scary and its sudden impact on capitalistic democracies ability to function that has spread the fear to the stock markets in a very short period of time. The trajectory of the market decline has paid no heed to risk – every type of asset has been hit. Even gold, usually a safe haven in such times, has fallen 12.5% over the last couple of weeks.
The government has introduced its measures to combat the virus in layers, increasing the restrictions every few days, it seems. The latest measures, locking down substantial parts of the economy, clearly have a serious impact on many, many businesses. The simultaneous flood of state funded financial assistance will be of significant help but there will be a lot of businesses for which it will prove insufficient and, possibly, fatal. During the last few days a number of quoted companies have announced suspension of dividend payments for the time being in order to preserve cash during the very uncertain coming months. There will be more. Companies with balance sheets fit for purpose in normal times simply have to secure the business’s survival at a time like this. It is incumbent on the management to do so for the future of their shareholders. Those shareholders have to make sacrifices but it will be much more palatable if managements can be seen not to be taking advantage.
This is particularly important for those investors who rely on dividend income to support their lifestyle. It is very difficult to assess all of those companies that may take the dividend suspension route. One would expect the supermarkets to be prospering at present but, even here, Morrisons has ceased its special dividends for the time being although the basic dividend is intact. Management of even financially healthy companies may take the decision to retain the cash under current circumstances so we cannot rely on that income being paid.
In markets such as these the unlikely becomes likely and the seemingly impossible possible. It is this uncertainty that fuels the market’s fear. We should really be taking a three to five-year view on equity investment. History shows that, however bad a bear market seems at the time, equities bounce back and move to higher levels thereafter, often much higher levels. In my lifetime in the market this was the case in every bear – 1974, 1987, 1989, the end of the dotcom boom at the turn of the century and the financial crash eight years later. I cannot tell you what the market will do tomorrow or next week any more than I could have told you three weeks ago that events would have unfolded in the way they have. I do think, however, that markets will come through this and a year or two down the road things will be much brighter. One thing I can be certain of – by the time we see light at the end of the twin tunnels that are economic recession (now a certainty) and the coronavirus pandemic, the stock market will have been travelling northwards for some while already. The huge government/BoE measures to shore up the economy, in tandem with other western governments and central banks, have every chance of making the recession comparatively short however sharp it is. The market nadir may be closer than we think. If you are able, I urge you to take the long-term view. History is on your side. If, however, you are not prepared to do so you must let us know.
I would like to bring you up to speed with how we are coping at Dowgate. The offices are now manned by a skeleton staff, the vast majority of us working remotely from home. Needless to say this is more difficult and things that are usually done instantly can take a little longer. As ever, we are here to help but we would just ask that you think about whether the question is really necessary first and, if so, please allow us longer than usual to provide the answer. We, the custodians, the banks – all are suddenly consumed with staff welfare, most of whom are now also working remotely so quick answers, much of the time, are simply not possible. We will do our best, as will those others we rely upon.
I will continue to update the blog as and when but, just in case staff illness etc makes the emailed prompts difficult to send, you can always log on, say once a week, to check for new posts. If you go to our website www.dowgatecapital.co.uk and click on Blog, it will take you to the blog list.
It just remains to say take care everyone and stay safe.
Russell Dobbs FCSI
Chartered Wealth Manager