— Apr 23, 2020


Whilst markets fell further than we anticipated at the start of the coronavirus outbreak in China, as it became apparent that this was much worse than the SARS flu outbreak we referred to in our previous note on coronavirus and its impact, our conclusions remain the same.

We called the bottom of the UK stock market on Thursday 12th March (as per video on our website of the same day) when the UK and US markets were down over 10% on the day as this smacked to us of the capitulation which usually marks the low point.

As the word suggests, capitulation is when many investors just throw in the towel and sell (or in certain circumstances are forced to sell due to having used borrowed money to invest). Only once the sellers are exhausted can markets then start to recover.

Our call was not far off, as there were only three subsequent lower closes for the FTSE100 over the following week and since then markets have been on a recovery path.

The question now on every investor’s mind is, was this just a market bounce or the start of a new bull market? Our view is that equity markets are due a pause for breath as we wait for more information to emerge on the main points of tension: 1) the speed with which economies truly normalise after the lockdown ends (the rate of recovery) and 2) the damage done by the lockdown to companies and economies (the starting point of the recovery).

Our base position is that the extent of the damage to the economy will be larger than is currently being considered by the market, but this is not a view without counterpoints. If we look at the one economy which has been “through” the coronavirus, China the drop in economic activity during their lockdown captured the headlines. However, what is not widely reported is that Chinese new orders recovered into growth territory just two months after their lockdown started. Whilst this is a command economy and thus one in which they were able to make the decision to open up businesses quickly, the Western world may echo that particularly with the stimulus being applied to the economies.

The extent to which behaviours and consumption patterns will change will depend on the length of the lockdown. Humans are creatures of habit and our behaviour patterns are the result of centuries of micro changes and accommodations. It is likely that these base familiarities will prove hard to shift but it will be a long time before many people feel safe and that affects behaviour.

However, where we believe there will be great change is among individual companies and industries as there will be more clearly defined winners and losers. The rising tide of economies when we emerge from this will not raise all boats. Those that were weak going into the crisis may fall as the lockdown only hastens their inevitable departure. Indeed we are already seeing this with the obvious example being in the retail space, with names such as Debenhams and Cath Kidson going into administration and others certain to follow. However the corollary of this will be reduced competition and better trading for the survivors such as internet based retailers.

However, determining the weak from the strong is a nuanced judgement. Businesses and sectors will struggle in ways not readily apparent and those where the demise is predicted may surprise with their resilience. This is where the skill and experience to navigate such conditions will become paramount to returns.