William Hobbs, Chief Investment Office at Barclays Wealth & Investments surveys the economic outlook for investors.
Over the last few years we have mused a great deal on the value of specific expertise. In an era when five minutes on the internet can help any of us briefly feign such expertise, the value of genuine expertise is often lost. A month ago most people on the planet had not even heard of the study of epidemiology. Now we find armchair infectious disease specialists outnumber the country’s collective toilet roll stash. This week, we report on what we are hearing from the specialists in infectious diseases and have a look at what to do in amongst rioting capital markets.
What are the real experts saying?
Probably the best information we have at the moment on fatality and transmission rates comes from South Korea. This is where the most extensive testing has been done so far. On this evidence the so called ‘case fatality rate’ looks to be about 0.6%. So 6 people in every 1000 who test positively for COVID-19 sadly die. Now you could argue that because of what the experts called a ‘severity bias’ that this still may overstate the real fatality rate of COVID-19. Essentially only people with relatively severe symptoms are going to get themselves tested. We know that the majority of infected with this disease experience very mild, cold like, symptoms.
So the point is that this is certainly more serious, more fatal than seasonal flu and for parts of the population, it is a very serious condition. On the other hand, it is a lot less fatal and transmissible than some are suggesting, so the difficulty for governments and authorities is how to respond proportionately. There are no easy answers here, but history suggests that any related panic is almost more dangerous. This is particularly the case in countries with already fragile health systems.
On seasonality, we can point to 4 coronaviruses currently in circulation that cause the colds and so on that regularly afflict all of our winter seasons. This new coronavirus and its associated illness, COVID-19, now joins this family of viruses. So although we don’t yet have firm evidence of seasonality, there is some potential for slower transmission as the northern hemisphere warms. This will potentially have the reverse effect on the southern hemisphere though.
In terms of treatment, we have the advantage of being able to look at several anti-viral drugs that have already been through some degree of testing. Remdesivir is one that was trialed in the fight against Ebola. It didn’t do so well there, but fared better against MERS. There are trials ongoing to see how effective it is against COVID-19. One interesting aspect here is that there is already quite a lot of safety data available from the Ebola trials. If it is proved to be effective, then we could see production ramped up in the next few months. There are other potential candidates too. Vaccines will inevitably take much longer, even if you are seeing some potential candidates entering Phase 1 trials already.
Economy and markets
The sharp, in some cases unprecedented moves, in capital markets represent evolving attempts by investors to guess at the economic damage. Certainly there are parts of the services sector that are already suffering from the containment efforts as you might expect.
Alongside this, there are some added nerves resulting from the sharp declines in oil prices that follow the collapsed talks between OPEC and Russia. Essentially, a price war among the oil market’s two biggest players is fueling worries that a default cycle amongst oil companies is coming. This obviously has many implications for the world economy. There are stresses to consider in the oil sector particular and those actors that have provided finance to the more vulnerable parts of the sector. More broadly, you can argue that lower oil prices are a net positive for growth in the medium term. Essentially wealth is transferred from the few that control the world’s oil resources to the many that use it. However, with such a sharp fall we know that in the short run the negative effects can outweigh those positive longer term effects.
So taken together, where does this leave the global economy? The reality is that there is little we can confidently say about the economic costs of containing the virus as well as the oil price collapse. However, for those looking for some reassurance, the world economy entered this crisis with many of its most important actors in much better health than feared. US consumers in particular remain in sound economic health. Policy makers around the world have some capacity to mitigate some of the effects on some of the worst affected areas, as we are already seeing some evidence of. This incoming economic dual-punch is likely a one-off hit of admittedly uncertain size.
What can policy makers do?
There is a bit of leading a horse to water but not being able to make it drink problem. Central banks lowering interest rates is not going to make consumers do the things that COVID-19 containment efforts are stopping them doing. We may not want that to happen in truth. However, central banks and governments can certainly help ease the strain on some of the most affected businesses. Buy them time to be able to absorb this shock. This is very much what we have seen from the UK’s central bank and government this week.
What can we do as investors?
This is certainly a time when you are very grateful for the diversifying assets in our strategic asset allocation. It is also a time to be thankful for the painstaking efforts the team put into to organizing these assets in the most effective way possible, to mitigate exactly these types of markets. However, in the tactical side of the portfolio, there are some extremely interesting opportunities cropping up. When emotions are running high in markets, this tends to be a great moment to stay dispassionate and take advantage. For medium term investors, we would make the same point as we have made many times before. Investing in a medium risk portfolio is very simply about trying to harvest future gains in humankinds’ productivity. COVID-19 has no bearing on that productivity story. So you can plausibly argue that investors are simply being offered the same ticket but, given the dramatic falls in stocks and other risky assets, at a materially discounted price.
This is a time to rely on the advice and guidance of specialists. The way that we organise our investment process plays specifically to this theme. We, and our clients, benefit from having a wide array of specialist teams focusing on particular areas of the investing value chain – from asset allocation to fund selection. We expect that over time that harnessing this range of specialisms in our multi-asset class funds and portfolios will continue to reap the superior returns that we strive for on behalf of our clients.