It is becoming increasingly apparent that this virus, while serious, is not as deadly as some of the early figures suggested, as many cases seem to have gone unreported. Across the population the death rate is probably going to be around 1% for those infected. Whilst the haunting news of the death of the 34-year-old Li Wenliang, the whistleblowing doctor from Wuhan sticks vividly in our minds, this seems thankfully an exceptional case. This is a disease that predominantly takes the old and the sick. Though all age groups remain at risk, and many will require hospital treatment, 99% will pull through. The Koreans have been assiduous in their testing and identifying all those who have the virus. I am no virologist, but looking at the mortality rates there, I reckon someone in my age group (I turn 52 on Thursday) has approximately the same risk as dying from Covid-19 as any other disease or accident that might befall me over the course of the coming year. According to the bandolier.org.uk website, UK men in the 45-54 age bracket have a 1 in 279 risk of dying through any year. I then considered the odds for my 90-year mother, where women aged 85 and over have a 1 in 7 chance of dying in any year, which is perhaps comparable to her fatality chances if she contracts Covid-19. This, I am sure, is an approach that only provides a rough approximation of the risks; however, others may find this a useful way to illustrate the risk that the disease brings to us all. Both my mother and I are lucky as we enjoy good health. Those with illnesses may need to adjust the numbers accordingly. Note that the majority of those even in the most vulnerable grouping will pull through if they are infected. We need to keep the risks of this epidemic in perspective and not be overly anxious.

The speed of the spread of the virus is mind blowing. A few weeks ago, our hopes were growing that the Chinese were successfully isolating the disease within their population. We had then hoped that the Koreans and Italians would also be able to contain and isolate the virus during the early stages of their outbreaks. The Koreans managed it, tragically the Italians failed.

The cat is now out of the bag and Europe is now the epicentre of what is a global pandemic. In an attempt to slow the speed of transmission, cities in Europe and soon elsewhere are being shut down, albeit temporarily. This will give our health services a chance to deal with the severely ill and help minimise the death rate. This action will also reduce the overall incidence of infection.

I am fortunate. I am writing this from my home study, and I am able to perform my work with only minor disruption. Twenty years ago, that would not have been possible in anything like the same extent. Modern technology will allow many businesses to operate and function fully. This allows other essential roles such as food production and distribution to carry on, while lowering the risks of infection. Meanwhile the trojans in our health service will be allowed to battle the disease with fewer impediments. However, the closedown leaves many sectors of our economy with a sudden collapse in demand. Those working in the travel, leisure and hospitality industries suddenly find themselves with no business. Many of these firms could be forced to shut down, but we question the economic sense in this. We may not to wish to travel abroad today, but we shall wish to do so in time. We shall also want to return to restaurants, theatres and sporting venues. It would make sense for governments to support these affected businesses and for their staff to be kept on the payroll, rather than thrown onto the dole. With borrowing costs at essentially zero, the cost would be relatively modest. However, where will this leave equity holders, why should they be bailed out? I am sure we all remember the public backlash for rewarding bankers during the credit crisis. However, in that case the cause of the crisis was the banks’ own folly. This is a situation that is not the fault of hoteliers or airlines. In fact, it is a consequence of government action to protect the health of the nation as best it can.

In 2008/9 the German state experimented with keeping businesses alive through a loan programme. The generous German social safety net is expensive to finance, so it makes it particularly worthwhile for the country to support potentially viable commercial enterprises and keep temporarily redundant workers employed. On Friday 13th March, Chancellor Merkel and President Macron announced a huge package to support businesses in their countries, from the humblest taxi driver to the largest employers. They pledged ‘to do whatever it takes’. We shall investigate the implications for Europe and the cost to business, but this lifts some of our concern about how adaptable Europe can be in the face of this crisis. However, it does not necessarily follow that companies and shareholders will be treated the same way in the UK and, most importantly, in the US.

A week ago, the UK Chancellor spoke about the economy growing 1.1% this year, today it is obvious that we are in recession. Event President Trump concedes that the US economy is about to shrink. We now face a sharp global recession following one of the longest expansions on record. We have to ask ourselves, where have the excesses been? The old expression ‘when the tide goes out, we find out who has been swimming naked’ comes into play. This is a complex puzzle. Landmines by their nature are difficult to spot, these are now likely to go off. We need to double check that our portfolios are not going to get caught up in any likely blast zones. Though we don’t know for sure, our worries include Chinese debt (which is virtually all domestic) – hence our little exposure to China, and Private Equity – particularly the debt part of the equation (please let it not be the banks again).

Markets are moving so swiftly. We think that it is very dangerous to attempt to make portfolio changes when markets are now swinging by 5% or even 10% on a daily basis. Trying to make rational fund decisions in irrational markets can detract as much value as it may add. We have favoured the simpler solution to rebalance our portfolios back to our model weights until such time it we are confident in making long term value decisions. Instead, we will spend the coming days considering which funds present the best opportunities as other investors make panicked, or forced, sales. We are also closely examining our existing positions to assess their vulnerability in what is such a rapidly changing situation. We know that we cannot hope to call the bottom of this market, although equities on dividend yields approaching 6% in the UK (even if not all are paid) are attractive compared to the return on offer from any other financial asset. We will consider at what level we shall look to add to positions. We are long term investors and our focus is upon identifying what will produce our clients the best long-term risk adjusted returns. Experience informs us that the best opportunities arise in markets such as these.

 


As at 16 March 2020