A great act of social discipline.

The latest readings on the global economy are quite shocking and the challenges of fully lifting the lockdown soon mean that a swift V shape rebound in economic activity looks less likely. The latest health figures show that the pandemic is coming under control as the rate of new infections and fatalities around the world are slowing and that infection curves are flattening or declining.

Professor Whitty has confirmed that the UK reproduction R rate for the virus is now below 1, so providing greater control of the spread of Covid19. Our lockdown has clearly worked through a great act of social discipline.

As the pandemic eases so the concerns over its impact on the economy rise.

The IHS Market purchase managers index is a leading barometer of early stage confidence in the economy. The index measures confidence in the near future and a figure of 50 or more is positive. The UK PMI figure was 36 in March and fell to a record low of 12.9 in April. In Europe the figures were similar.

It has always been felt that Q2 will see the worst of the economic news with the hardest and heaviest falls in activity. Two factors will influence our success in being able to navigate this difficult period. Firstly, the global response from governments and central banks, the second our exit strategies and the speed of lifting restrictions. It is vital that policy support comes quickly on stream. The huge fall in activity and cashflow needs be supported or otherwise bankruptcies and lay offs result. HMRC should be congratulated by the swift and massive furloughing programme but the business loan access process has been less effective. Banks must swiftly extend credit especially when it is 80% guaranteed by the Government.

Banks have been instructed to cancel dividend payments to shareholders in order to keep money in the bank to either lend or meet losses. This request has had an obvious impact on the value of bank shares over the past two months.
A credible exit strategy is key to the shape of the recovery and the V shape recovery predicted by the Office of Budget Responsibility (OBR) is looking more unlikely. Those countries ahead of us in the contagion and who have lifted their own restrictions are seeing a general nervousness in their populations and a reluctance to immediately return to normal. It would not be a surprise if consumer caution was a new factor in the global recovery.

China is clearly ahead and their fast-improving economic indicators tell us they have managed to turn their economy back on. However, this is focused on the manufacturing sector, while any part of the service sector that involves close human to human proximity remains dormant. The reason for this is a very strict “track, trace and isolate” policy, based on a mobile phone app that regulates individuals’ ability to access places outside their home depending on previously-recorded movements and encounters. Any accidental encounter that was more than a mere passing in the street with anybody who later tests Covid-19 positive means going back indoors into strictest 14-day quarantine.

This ‘hiding from the virus’ approach has proven highly effective in preventing higher fatality rates, but comes at the cost that unless a cure or vaccine becomes available soon, society remains exposed to the risks of a second wave and therefore has to remain in an economically painful soft lockdown for the time being.

Sweden has deliberately chosen the other extreme. Their approach has aimed for self-immunisation through infection, also referred to as ‘herd-immunity’, by allowing the virus to spread slowly and thereby paying the price of a higher fatality rate amongst, in particular, the elderly and vulnerable. Clearly, once a population reaches ‘herd-immunity’ the risks to public health and the economy of a second wave disappear.

Most western nations, including the UK, find themselves somewhere between China and Sweden. Should effective anti-viral drug treatment prove impossible in the near term, and mass vaccination roll-outs arrive only in 2021 as predicted, the Swedes’ herd immunity approach could turn out to have been the winning strategy, as long as they can maintain public backing by keeping fatality rates to levels no higher than elsewhere in Europe.

Should Covid-19 suddenly disappear in May as SARS did back in 2003 or the pharmaceutical industry succeeds in the race to find a vaccine, then the Chinese approach of buying time through quarantine would be deemed to have made the most reasonable balance between the human and the economic cost.

Politicians everywhere will be following the relative success of both approaches very closely over the coming weeks. That, together with each countries’ ability for mass infection and antibody testing will inform their decision making.

It would appear each countries’ speed and ability of returning to pre-virus activity levels will determine whether their recoveries will follow the V shape or the U shape recovery pattern. With growing signs that the UK and other developed countries will be starting to ease their lockdown within the next few weeks can only support a swifter recovery. The OBR’s prediction for a V-shape recovery is very dependent upon the easing of lockdown.

This crisis has brought to a head some of the weaknesses of the UK economy not least in our own manufacturing capacity. High labour costs have over many years lead to an over reliance on overseas suppliers and this is highlighted by our on-going trade deficits. Perhaps in a post Covid19, post Brexit world we will focus as much on home built and home-grown products as upon global trade.

From an investment point of view, travel and tourism are likely to be weak sectors while the trend to greater home shopping and now home working will only accelerate at the expense of High street stores and offices. Supply chains are likely to become less dependent upon distant travel links with more production sourced closer to home.

We are monitoring our investment portfolios everyday and are pleased to report that over the past month the recovery returns have been strong. Across the range our portfolios have fared better in the downturn due to our overweight in cash, UK gilts and US treasuries and have recovered in greater measure to the national average benchmarks due to our overweight positions in US equities, technology stocks, long dated bonds and gold.

---

Comments are closed.