Financial Markets During and After COVID 19 Part Two

Financial Markets During and After COVID 19

Part Two

State of Play in April

• Uncertainty was coming down:– Policy response will avert a great depression and a financial crisis– Lockdowns are getting the virus under control– Thinking has moved onto how economies will restart

• The Oil Price War had been resolved with a deal between the Opec and non-Opec countries.

• The shape of the recovery remained unknown. But a U shape seemed likely due to Fiscal support

• Market was pricing in a deflationary future as Bonds and Growth stocks were seeing inflows.

• Behaviour post the crises remains unknown:– It is expected that savings rates will stay high for a period – Fiscal Policy will have to step in

to ensure the recovery and is maintained.

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State of Play Today• Uncertainty has continued to decrease

• Economies have restarted: World has moved from lockdown to living with virus.

• Fiscal and monetary policy has been greater than many expected

• The economic recovery has been stronger than many expected.

• Oil prices have been continuing their recovery

• Equity markets have been recovering

• Markets are starting to think about inflation and longer term consequences of policy action.

• Permanent changes to consumer behaviour are still unknown

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The Big Questions

➢What is happening in the economy and markets at the moment?

➢What are the long term ramifications for economies from the Coronavirus

➢What are the long term ramifications for markets from the Coronavirus

➢Is the bull market of the last decade over? We think it is and the bull markets of the next decade will be different.

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Economies Have Restarted

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Back Spending Money But Not GOING to Work

Source: Wilmot, Opportunity insights 5th August 2020

Recovery Stronger than Expected

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Citigroup Economic Surprise Index

Source: Refinitiv Datastream 11th August 2020

Fiscal and Monetary Policy Support

Central Banks are Supporting

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Governments are Spending

Source: Refinitiv Datastream 10th August 2020Source: Macrostrategy 2nd August 2020

It’s a Global Response: Everyone is on Board

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Source: IMF 1st August 2020

Big Shocks Can Change Markets for Decades

• Global Financial Crisis • Post Pandemic

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▪ Austerity

▪ Money Supply didn’t reach main street

▪ Asset bubbles favoured Wall Street over the main street

▪ Low Inflation

▪ US Dominance

• Austerity is Dead

• Focus is on getting money to main street

• Different assets will work for the next decade

• Inflation is being encouraged

• US Dominance is under threat

The Pandemics Lasting Legacy?

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• Rising inflation expectations have sent US Real Rates Negative:


The Bond Market is Still Under Attack

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➢ Negative Real Rates Doesn’t mean Rates Cant go Up:

Source: Exane BNP Paribas April 2020

The Big Difference from the GFC is Who Pays

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Paying for the GFC Paying for the Pandemic

What this Means for Financial Markets

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There is Such thing as Flat Earthers

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➢ If your interested, they have an annual conference in Birmingham

No Surprise to see Equity Markets Recovering

• The conditions were in place for a recovery.

➢Monetary and Fiscal Policy was being put in place to restore economic growth.

➢ After falling 35%, Equity Markets were pricing in a lost decade, not a lost year

➢The question was then timing/speed of a recovery and what would lead the recovery?

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Not Everything has Recovered Equally

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Word Technology index and World ex US equity Index


Market Psychology Today

• Bonds becoming not investible due to low rates

• Uncertainty over the economy

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• Technology stocks are safe like bonds as even when things are bad we need technology

• Technology stocks benefit if the economy improves or if the economy gets worse and we all stay at home

➢ Lets All Buy more Amazon, Google, Apple, Microsoft and Facebook

The Elephant in the Room Hasn’t Gone Away

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Source: Bank of America 26th July 2020

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The Start of a US Dollar Decline?


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Beware Changes in Market Psychology

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Source: Bloomberg 6th August 2020

The Virus Impacted Markets so will the Vaccines

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Source: Mckinsey 29th July 2020

The Battle within the Market

Deflationary Shock Versus Inflationary Response

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The Bull Markets of the Last Decade May be Over:

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Deflation Assets:

❑ Government Bonds❑ US Investment Grade❑ US High Yield❑ S+P 500❑ US Growth Stocks❑ US Consumer Discretionary

Stocks

Inflation Assets:

❑ Commodities❑ Real Estate❑ TIPS❑ Equities in World ex US❑ US Banks❑ Value❑ CashNew Ones will Emerge

Source: Bank of America 13th May 2020

Global Equities Have not Been in a Bull Market

• The money has flowed into the United States, Particularly Technology

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World Technology Price and World ex US Market

Equities Outside the US Continue to Offer Value

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World ex US Market Price Index and World ex US Book Value


Technology Stocks Soar Above Book Value

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World Technology Price Index and World Technology Book Value

Asset Class Implications of a Negative Yield World

• Cash:

➢ Guaranteed to Lose Purchasing Power

• Bonds:

➢ Guaranteed to Lose Purchasing Power and Also nominal value if inflation pushes yields higher➢ Inflation Protected Bonds may offer protection

• Equities:

➢ Can Protect Against inflation but not all are equal➢ Equities with high fixed costs and the ability to get revenue increases are the real beneficiaries:

• Alternatives

➢ Commodities- Can be stores of value➢ Property – Can grow rental income➢ Infrastructure - If inflation protected

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Short term: Fear Continues to Dominate

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Source: Evercore 7th August 2020 Source: Bloomberg ICI 28th July 2020

Are investors looking far enough into the Future?

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Risks

• Short Term Risks:

➢ Policy Support is withdrawn bringing down asset prices

➢ A vaccine takes longer than expected

➢ Political instability in the developed world.

• Long Term Risks:

➢ Not Being invested as inflation WILL destroy savings

➢ Being invested in the wrong assets

➢ Stagflation

➢ Reversal of Globalisation

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What it Means for Multi Asset Fund Investing

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Running into Deflationary Assets Like Bonds and the US Dollar is tempting but doesn’t make sense.

Equities represent a hedge against inflation providing you own the right ones.

Real Assets such as Forestry, Gold, Infrastructure and Property will gain in importance post the crisis.

Cash can be used to avail of Opportunities in the Equity market or elsewhere

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Documents

Financial Markets During and After COVID 19 Part Two