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Corona Collapse

12 March 2020

I had hoped my 50th year in the London Stock Exchange, marked this month, could be remembered with tidings of comfort and joy. I suppose if that half a century were to teach me anything it should have been to expect almost any alternative. In a few short days mother nature has ripped the rug out from beneath global markets and sent a shiver down the spine of anyone falling into the category of high risk to the coronavirus. The distinctly disparate approach western governments have taken has probably not helped. The vulnerable are justifiably worried whilst many non-at risk groups appear to take the “bring it on” approach to the virus. After all, the majority of healthy people either suffer minor symptoms or hardly any at all. It is a distinctly cowardly virus.

Despite a belated refute by the Chinese government, it all appeared to begin in Wuhan, coincidentally, I’m sure, home to the Wuhan Institute of Virology. If the numbers are to be believed, they have got on top of the problem very quickly. Even if the actual numbers are four or five times the disclosed 80,000 odd total cases, it is a mere pin-prick in a total Chinese population of almost 1.5 billion people. Western governments may be at a disadvantage to the oriental authoritarian regime but some of the forecast case numbers seem totally off the scale in relative terms. The huge disparity only adds to the fears and confusion.

What is now clear, however, is that disruption to commerce and industry will be considerable, not just in the UK but globally. It is a phenomenon that will certainly see businesses reconsider their supply chains and may well prove a catalyst for the repatriation thereof or creation of multiple sources. Over the coming months business will adapt as much as possible but it will be expensive. It seems inevitable that we are faced with recession globally and probably domestically as well although the new Chancellor made a reasonable fist yesterday of trying to alleviate this as much as possible. I suspect the recession will, however, be quite short.

As for the stock markets, all have been hit hard – nowhere has escaped. The FTSE 100 is down 27% from its January peak, the 250 is off 26% and the Dow Jones, assuming the future indication of another 1,000 points off this afternoon, is 24% down from its February zenith. Algorithm trading is responsible for much of this and is self-perpetuating until the turn is triggered. The world is awash with cash but high on debt. The cash will be increasingly choosey about the debt it finances. There will, I am sure, be many casualties amongst those companies carrying high junk debt.

Having said that, the abundance of cash is still there and will be seeking a home when it is ready. Not only that but governments are likely to add to the cash pot with stimuli such as lower interest rates and, probably, various forms of QE. Some have expressed the view that this is 2008 all over again but it looks to me more like October 1987. That too was triggered by mother nature, hurricanes wreaking havoc to society and knocking the stock market for six over a few short days. The recovery was very much V shaped and, a year on from the event, looked like a minor blip on the charts. Recovery is driven by cash and confidence. The cash is around but confidence will build once we are in recession and the way out becomes visible. Rather than a V shape it may be more of a U but the horizontal base could be quite short. I’m afraid the keyboard doesn’t have one of those so my description, however inadequate, will have to do.

Markets are frightening when they suffer spells such as these and this one, I feel, even more so as it is reinforced by the fear for life. Times like these provide stark reminders that capital invested in the stock market carries risk. However, when it comes, the recovery will be sharp and the damage will only be repaired if one is still invested. I personally have not sold a share in this rout and, having not panicked early do not intend to do so after a near 30% decline. It will be a bumpy ride for a while yet though!

Russell Dobbs