This is all rather reminiscent of what happened in 2008 thankfully, on this occasion, the global banking system is far better capitalized and we don’t suffer the risks of falling into financial cataclysm as we did in 2008.
What has happened in the financial markets?
Well, clearly it’s been a very difficult course for all financial markets. None more so than the global stock markets, which has suffered some very severe declines around the globe. The arrival of Covid-19 has caused governments to shut down large sways of our economies, and as a result, companies are far from fully operational.
This is an unprecedented situation, and fortunately, it looks set to persist for some time yet. It’s all going to depend on when we get this virus under control, which is going to rest probably on one or two things. Either some therapeutic cure to keep people out of hospital and to stop them from dying or the arrival of some sort of vaccine. And certainly the second of those items look to be some time away yet.
How have financial markets traded?
Well, global markets have traded in a very violent fashion, and it’s a fact of absolutely everything. Not only stock markets, global credit markets, commodity markets, government bond markets, gold markets and energy markets have all really suffered some very major swings in prices over the quarter. And at times the trading has become somewhat disorderly.
This is all rather reminiscent of what happened in 2008 thankfully, on this occasion, the global banking system is far better capitalized and we don’t suffer the risks of falling into financial cataclysm as we did in 2008.
Clearly the shutdown will have a profound effect, on us all, interestingly, I’m shooting this video from home where I’ve been working over these last few weeks. Indeed, all my colleagues at Square Mile, have also been working at home. The organization as a whole has not really suffered that much in the way of disruption. It’d be interesting to see how our habits change once this shutdown has been released.
Likewise, even other businesses such as manufacturing firms will also change the way they operate at the back of this. Global supply chains are likely to become much shorter and less reliance on international trade.
Likewise, we can see an increasing move towards digitalization. This is a theme that is clearly in place already. However, we think these moves are going to be accelerated over the coming weeks and it’ll have profound implications for the way that the economy works.
What changes are you planning to make to the portfolios?
Markets have been moving so quickly over recent weeks. It’s been difficult to make structural changes to the portfolio. However, as things quieten down, we think we will make a quite a few changes. One area we will be looking more closely at is smaller companies, these tend to be more agile than larger companies and could end up being quicker to reposition themselves in today’s new environment.
Likewise. We also think that taxes are going to be rising. I’m afraid we’re all gonna be a little bit poorer. As a consequence of this global shut down and corporation tax is almost certainly likely to climb. On a risk of war basis, this means that there may be some better opportunities in the fixed income market, the more than the traditional equity space.
Markets have come a long way over the last few weeks and it’s been a very rapid climb from the lows, which we saw in the middle of March. We think there is going to be some further bad news. There’s a second-round impact of the collapse in demand feed its way through the system. This could present us with some interesting opportunities to be buying into some cheap stocks.
We’re currently in the middle of reworking our investment models, to take account of the new environment and to help is firm up what would be a good valuation entry point into risk assets.
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The information within this article is for information purposes only and does not constitute investment advice. they represent the opinions of the fund manager and those of Square Mile. It does not contain all of the information which as an investor may require in order to make an investment decision. Any reference to shares/investments is not a recommendation to buy or sell. If you are unsure, you should seek professional independent financial advice
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