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Boris’s Return

27 April 2020

I keep reading about the disruption caused by Covid-19. How right they are. After 50 years of travelling up to town and back home again in the evening, I can’t tell you how hard it is to change one’s daily routines. I might well get an extra hour and a quarter in bed in the morning but having risen early for so many years the body just doesn’t seem to want to stay there. Six o’clock and the shower comes as a welcome relief. One day just seems to roll into the next. I found myself sitting at the computer ready to start work last week, cursing the machine because the price feed wasn’t working, only for Mrs D to remind me it was Easter Monday. Stupid Boy!

And when I do venture out? Oh dear. In the queue at good old Boots the chemist, I politely asked a young girl standing on my shoulder, with a mobile stuck to her ear, to move the statutory 2 metres away only to be greeted with a blunt refusal while she commented to her correspondent on the other end of the phone that she was being hassled by some weird old guy. Well, that told me. It’s a wild world out there you know.

I have to say, I’ve rather missed Boris’s blustering but bullish tones at the daily government briefings and it feels as if the cabinet has struggled a bit without him. Following his close shave with the virus we can only hope it is the same brash but decisive PM that returns to the hot seat today – he needs to quickly take a firm grip of the tiller and show that plans are afoot for the unlocking of the economy. It is easy for the media to pick holes in the handling of the problem thus far – an unprecedented global situation took the world by surprise thanks to the Chinese cover-up assisted, it would seem, by the WHO, so the rapidly organised response was never going to be perfect. The government chose its path based on the scientific advice it received, has learnt along the way and done what it can to adjust where necessary. The hardest part is likely to be the rolling back of the lockdown.

At least with the Bank of England able to act as our lender of last resort the massive funding necessary for the exercise to date has been achievable and the route to recovery is in our own hands. Compare this with Brussels where the Covid problem has enormously exacerbated the already deep-seated rift between the northern and southern EU states. Germany, as ever, obstructs any chance of collective funding, instead forcing a “compromise” which repeats all of the same painful errors as with the financial crisis a decade ago. Simply loading even more debt onto states that are already drowning in it makes no sense and may yet create the final rift that pulls the union apart, Italy the most vociferous in its opposition as well as being the most indebted. France’s Macron is also a heavy critic and is pushing for a fiscal union that neither Germany nor Holland are ever likely to support. Brexit has been side-lined during the Covid chaos but, if anything, it should strengthen the UK’s bargaining position. Boris should certainly stick to his guns – if membership of this club were thrown open at present the queue to sign up would be exceedingly short.

Following the oil price mayhem last week, when the price of West Texas Crude turned sharply negative for a short period of time, the pressure on the OPEC states, particularly Saudi Arabia, and Russia to further cut production is enormous. In the US it is likely to occur naturally – they are running out of storage capacity and it is relatively simple for the fracking industry to turn off the taps. Some underfunded companies will go bust and the big boys will buy up the assets cheaply and patiently await recovery. It is far more difficult to cease production at traditional wells but OPEC and Russia will have to agree more substantial cuts in the end and the quicker they do the better for all. All, that is, apart from China, which is engineering a fairly rapid recovery from its own lockdown and imports virtually all its oil.

The equity markets have enjoyed a sharp recovery of some of their lost ground but all is not quite what it seems. The S&P 500 has recovered almost 27% from its March nadir, a rally that would normally be regarded as possibly signalling the beginning of a new bull market. However, when one digs a little deeper it is apparent that this rise has been hugely driven by the extremely heavyweight  FAANG stocks, Facebook, Amazon, Apple, Netflix and Alphabet (Google) and a few other technology companies. Outside of these the recovery has been much more pedestrian. The recovery in the FTSE All Share Index has been around 16% from its March low point, probably a more likely figure for a FAANGless S&P. That is not sufficient to be regarded as the beginning of a new bull but could be dangerously tantalising. I believe one should avoid being sucked in at this point. It is too early. We have not yet seen any notable companies going bust but, after a shock like this it would be very surprising if there were none. Perhaps when we do see one it will mark the bottom. After all, there is going to be a long line of rights issues and other capital raisings. The nimble have and are already doing it. The longer the delay the shallower the coffers will be and the greedier the funders and underwriters will get. You wouldn’t want to be last in line!

Russell Dobbs FCSI

 Chartered Wealth Manager