Weekly Digest & Corona Virus Update – INVESTEC

Click here to read the Weekly Digest

Last week was an extraordinary one as we continued to see the impact of COVID19 across the developed world, with California and New York implementing shut down policies. Notably, the Federal Reserve was aggressive in money markets and bought over $100 billion of bonds and mortgages on Friday, as well as adding a further $1 trillion in overnight repurchase agreements. To put that in perspective, the Fed on Friday alone just bought the entire GDP of Ecuador. It appears to be working: US ten-year treasury yields fell from 1.14% to 0.8% this morning.

As of the latest reading from the European Centre for Disease Control (ECDC), there are now 306,000 cases globally with 224,000 of those outside China. The daily growth rate in number of cases outside China has not shown much sign of slowing over the past few weeks, consistently hovering around 18% per day. On a more positive note, Wuhan has reported no new cases for four days in a row and the daily case growth in Italy has dropped to just over 10% (from the 13%-15% range of the last five days). Infections in Korea and China peaked around 1.5-2 weeks after the lockdown took effect, so from lockdown this could take roughly two weeks to start showing elsewhere (e.g. UK/USA).

Our View
Whilst painful, we wish to stay calm and focus on making the right long-term decisions for our clients’ portfolios. We do not have a competitive advantage on how coronavirus will pan out, but the next couple of months should see the peak in volatility/panic. While we cannot yet be certain of the full economic impact of these events, we do believe that this episode will prove relatively short in the context of our long-term investment time horizon. Factors that cause us to have this view include:

1) The panic is about a specific thing and COVID-19 can, and will, go away (even with subsequent waves)
2) The financial system is strong
3) Fiscal policy will reduce the damage to the economic machine when it re-starts
4) Losing, for example, one year’s earnings will be looked through by forward-looking financial markets (in our opinion this justifies a 5-10% equity fall once panic subsides, not 30-35%)
5) When Europe removes restrictions, then the US, economic activity will rebound
6) Economic growth to trough in Q2 and accelerate in Q3
7) Back to 90% of pre-crisis economic output by the year end

Steps We Are Taking
We are not trying to call the precise bottom of markets. There are technical and other factors that could make markets even tougher in the short term. There are businesses that will not survive but, in the long run, it will be right to buy excellent businesses at discounts to their long-term values. We are using the daily confirmed case % growth rate as a key data point to help us.