Market Comment 19/03/2020
Cornelian's Market Commentary - 19th March 2020
Read Chief Investment Officer Hector Kilpatrick's latest maket update
Recent market moves have been brutal. The speed by which the US equity market transitioned from pushing towards new peaks to entering a bear market (defined as falling 20% from the peak) has been unprecedented in recent times.
It now appears that there is to be a hard lock-down of western economies resulting from the desire by governments to control the spread of COVID-19. This has raised fears that the damage done to economies and companies by the resultant demand and supply shocks will be structural.
Economic activity relies, to a greater or lesser extent, on debt. A prolonged hard lock-down threatens a material debt default cycle and mass unemployment and this is why we feel such an outcome will not be tolerated, despite investors beginning to price in such a scenario.
Policymakers should understand that it is one thing to provide massive short-term stop-gap measures to protect the population and companies during a hard lock-down and quite another to be able to do this over any length of time. To our minds, the harder the lock-down the better and if it is successful in halting the spread of the virus, the swifter the recovery.
However, if it is perceived that the virus is going to be long-lived then the government’s focus of responsibility will shift to the tax generating working age population and their need to work. We, therefore, believe that (however unpalatable and unpleasant the trade-offs are) governments will not and cannot persist with the hard lock-down model for a prolonged period and will have to move to the herd immunity model, if the virus is not defeated in the near term.
The level of pessimism in the market concerning the lock-down has become extreme with some gauges of market ‘fear’ already surpassing the highest levels observed during the “financial crisis” of 2008/9, when a wholesale bank sector collapse was feared. Today, the banking sector is in a much stronger place to withstand the storms ahead. Nonetheless, forced sellers continue to drive asset prices down and this has become a vicious cycle and one which is likely to persist until they are cleared out. Positively, this provides excellent buying opportunities for those prepared to move against the consensus and invest for the long term.
For markets to find a floor, investors need to be able to scale the economic impact of the virus, quantify the scale of policymaker stimulus and predict the duration of this crisis. Companies have only just started to sketch out their assessments of the impacts and this is helping analysts understand companies’ sensitivities to the downturn more accurately and may help alleviate the more extreme concerns in the market place. We believe policymakers will continue to deliver on promises to ‘do whatever it takes’ to protect the economy and that further and more targeted initiatives to support consumers and companies are likely to be announced in the short term. The key indicators for the duration of the virus are the daily infection statistics.
Ultimately, we are looking for governments to level with the electorate and explain when and under what circumstances plan ‘B’ (ie. herd immunity) would be enacted, which would allow economic recovery to take place even in the presence of the virus. During the interim, however, any sign of a decline in infection rates resulting from the hard lock-downs will be taken extremely positively, particularly when allied with massive policymaker stimulus and this may not be as far away as feared.
Cornelian Investment Team
19 March 2020
Chief Investment Officer