An Investment Update

08 June 2020

Most investment markets have of course been highly volatile over 2020 as we have entered unprecedented times created by the real unknowns of the Covid-19 pandemic. It is also difficult to make comparisons from the past to the current global position, however, there are some grounds for looking to history to inform our current situation.

The team at Chapters Financial maintains an Investment Committee to review investment allocations and our investment 'house view' on a regular basis. Our virtual meeting in May 2020 was helpful in considering client portfolios, pensions and ISA positions, to maintain our advice service to our clients.

To maintain a healthy critique of our house view, we have for over a decade employed the services of Steve Williams, Director of Cormorant Capital Strategies, to provide additional experience and an external view of our ongoing asset allocation models and positions for clients. He has provided us with a helpful and forthright update for the beginning of June 2020, noting that past performance is not guaranteed, and that fund values can fall as well as rise, as we have certainly seen over the last few months.

The detailed update is below:

April and May 2020 were bad. June 2020 will be better. July and August 2020 will be good. That's my forecast for the virus, the policy response to the virus (the lockdown) and for economic activity.

It's not a place I occupy with regularity, but I find myself on the optimistic flank of the investment management herd. A great many of my fellow grazers are concerned that the lockdowns will stay in place for longer – spurred by a second wave of infections – and that ultra-low levels of economic activity will persist for longer too. They worry that things will not return to 'normal' for a very long time and that the post-March increase in equity prices is precipitated by a false hope.

I think the majority are wrong, though some are more wrong than others of course. Those that make particularly egregious errors of judgment are drawn to comparisons with the Spanish Flu or with the Great Depression.

I'll leave the pathological comparisons between the Spanish Flu and Covid-19 to others better qualified but I think those that believe the comparison to be a valid one have a lot of work to do to substantiate those claims.

Those drawing on the Great Depression for their model are fooled by the numbers. It's true, if we squint our eyes, the dramatic declines in economic output, falls in stock prices and huge run up in the unemployment count do look a little like those associated with the Great Depression. But that is where the comparison ends.

The Great Depression in the 1930s and the Great Recession in 2008 have their similarities. They were both precipitated by failing financial markets. Failed financial markets don't just see large declines in asset prices, the real damage is the sustained impediment in the flow of credit with banking crises being one of the more visible aspects. Aside from the immediate economic impact, dysfunctional financial systems are a serious impediment to recovery. The Great Depression was almost inescapable for that reason and policy mistakes encouraged setback after setback.

The 2008 Great Recession was associated with far fewer policy errors but still, a failed financial system saw the British economy shrink by 6.0 percent over the course of 15 months and it took another 60 months, or 5 years, to recover the lost output.

It looks likely that we will lose in the region of 8.0 or 9.0 percent of output this year. Even more stunning is that almost all of that loss will likely come in just three months. Estimates vary greatly but I'm guessing that the April to June period (Q2) will see output fall by 16.0 to 18.0 percent. To pile guesses on top of guesses, I'm guessing that Q3 brings about an increase of 9.0 to 11.0 percent and that is followed by further gains in Q4 to cut the total loss back to the 8.0 or 9.0 percent range I mentioned earlier.

As big as those numbers are, though, what nourishes my optimism an awareness that the financial system has weathered this storm. Markets have remained functional throughout; largely owed to a competent policy response from both the Bank of England and HM Treasury at home and other central banks abroad. That being the case, we have all that we need in place for a vigorous recovery as and when the time is right.

And in that regard, my position is not so different from those in the herd forming the centre ground. I expect it will take not much more, if indeed it is more, than two years for us to recover to pre-pandemic levels of output. As far as I can tell, those in the centre ground are beginning to gather somewhere between there and the 3 year mark.

My beef is not with them. It is with those that think what we are facing today is as damaging as the with the Great Depression. It is not.

Steve Williams


Cormorant Capital Strategies

If you would like to consider your investment and pension planning a stage further, then please contact the team at Chapters Financial Limited for our latest views and comment.

No individual advice is provided during the course of this blog.

Keith Churchouse FPFS


CFP Chartered FCSI

Chartered Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899

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