Market Commentary

02 April 2020

By David Palmer, Co-Fund Manager DMS Verbatim Portfolio 5 Income Fund

The end of this week has left no question that this is a truly global pandemic. COVID-19 began in China, spread through Europe with the US now becoming the epicenter of a truly vicious outbreak. Worryingly it is spreading to Emerging Markets, where healthcare systems are less well resourced to deal with a crisis that has overwhelmed health services the world over. A small amount of encouragement can be taken from Japan, Singapore, South Korea and China with initial indications that robust containment measures and social distancing do work in managing the spread of the virus. The Emerging world will soon face a huge challenge though and we are also watching for the threat of a so-called ‘second wave’ in China as economic activity starts to resume there.

Our best estimate is that the economic impact of this will be profound, with anywhere from a 2.7%-3.7% decline in global GDP expected. We think it is unlikely that economic activity will begin to return to previous levels much before the year end. In the Eurozone (and to a certain extent the UK), Services form a large portion of the economy and so will be hit particularly hard. To provide some context, we expect to see greater declines than those experienced during the great financial crisis of 2008/2009 and only the second $USD global decline in GDP in 50 years.

The fiscal response has been enormous, led by the US Government’s $2Trn (10% GDP) proposals which include $250Bn in personal payments directly to US citizens. Whilst it is dwarfed in size by the US, a notable mention should also be made for the UK as Rishi Sunak has announced targeted measures which have provided a template for Governments around the world. Whilst national Governments in Europe have done what they can, the European Union continues to debate the feasibility of a mutually funded “Corona Bond”, with more fiscally conservative nations expressing their reservations, progress on this would be widely welcomed.

The c. 3.3m jobless claims just announced in the US are extraordinary and there is every possibility these could become much larger over coming months. As one may have predicted, leisure and hospitality have suffered most. Other economic data (including PMIs) are no more encouraging. The UK looks to have had an element of protection, having been at the forefront of the fiscal response and entered the crisis with relatively high employment, the weakness in sterling should also aid as the recovery comes.

Whilst the falls seen in Financial Markets have not yet been the largest recorded peak-to-trough, the speed of the declines has been extremely fast. This has precipitated dramatic action from Central Banks and Governments in response which gives us some confidence about the smooth functioning of financial markets during this period. Greater clarity around the spread and ultimate control of the virus could lead to an equally sharp rebound. Unfortunately, we do not think this is the end of the crisis and investors should stay braced for more highs and lows. However, as volatility has reduced from its peaks and financial market conditions have eased from their very worst levels we believe we are moving through the first phase in the recovery. We remain cautious until data has caught up with reality, profits and dividends will certainly suffer as we move through the year. We are currently stress-testing all of our Equity holdings, to look for pressure points in their balance sheets and cash flows and will make adjustments promptly if and where required.

This crisis will be very painful for people and for the economy and there is a real possibility that working patterns are permanently changed as a result of the collective adjustments we are all making. At this early stage, we have seen sharp increases in the adoption of technology (as can be illustrated by the increase in online grocery orders, downloading of workplace ‘apps’ and the sheer volume of internet traffic).

In the short-term virtually all companies share prices have suffered but we invest on behalf of you and your clients in a number of companies under our Digitalisation and Automation themes which do stand to benefit from this tailwind of growth in the long-run as companies find more efficient ways of doing business when normal functions are disrupted and work patterns change. Whilst the impact of the current crisis cannot be underestimated, we continue to focus on long-term secular drivers of growth and believe that focusing on these areas (Ageing, Climate Change, Digitilisation, Automation and Evolving Consumption) will underpin strong long-term performance for you and your clients.

The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.