Client Affairs

Stay Positioned For Equity Recovery Sooner Rather Than Later - Rothschild

Kevin Gardiner, 14 April 2020

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Suggestions that the globe faces a 1930s-style Depression because of the suppression measures to squash the virus are premature and long-term investors ought to be positioned accordingly, the wealth management institution says.

As this strange Easter break ends, we thought we would share Kevin Gardiner's thoughts on the global economic suppression taking place. As global investment strategist in wealth management for Rothschild & Co, where wealth preservation and investing with the long view are bywords, the veteran economist carries that perspective in his latest, infrequent, briefs. He looks at the public tone, market facts, and where some balance is beginning to emerge among those trying to figure all this out.

Our focus in these pages, remember, is on the narrow world of economics and finance. It can seem insensitive even to mention these matters at such a difficult time: it should go without saying that our thoughts are with the families of all those hurt by the illness, and our thanks go out to the dedicated healthcare workers supporting them.

Since we last posted an update in late March, Western economic data have begun to catch up with the reality of the suppression policy; contagion rates in some of the most affected European countries have tentatively slowed; the public debate has opened up a little; and markets are broadly unchanged (not that you'd know that from Monday's outsized moves).

Ironically, the biggest ever moves in some economic indicators - such as the ten million jump in US jobless claims, which almost crams an entire cycle into just two weeks' data - have somehow lost their ability to alarm.

This is because a big economic downturn, possibly the sharpest ever, became inevitable as soon as the scale of suppression became clear. So not only is this the first ever deliberate downturn, but it is also the first whose timing and scale are unanimously expected. This is not a contentious recession.

As a result, as more data arrives - possibly including double-digit declines in GDP and EPS, maybe even on a non-annualised basis - it may not receive the attention it would get in other circumstances. Gloomy economists who've spent a lifetime waiting to see such moves may feel somewhat cheated (a nice problem to have, perhaps).

Meanwhile, the numbers of new COVID-19 cases in Italy - and possibly, and most recently, in Spain - seem to have been moderating. At the same time, China is not yet reporting a big second wave.

Globally, led now by the US, the spread of the illness is still exponential. However, with China, Italy and Spain suggesting a timespan of maybe four to six weeks from the visible onset of the illness to peak contagion, might we expect those numbers to follow suit in the weeks ahead also?

The public debate has also taken on a slightly different tone. The blame game is gathering momentum, but in the narrow investment context only, what matters most is not which politician or public health official was right or wrong - indeed, as we suggested in an earlier post, in politics sometimes there are no good outturns, only painful choices - but what happens next. An altered political mood could affect that.

Since the scale of governments' responses became clear, the loudest dissenting voices have been those who've felt that more should have been done, and sooner. Things may be becoming a little more balanced. In recent days, we've seen public discussion of:

-- The distinction between "science", and the mathematical modelling of complex systems in which hugely different outcomes can reflect small changes in some key variables;
-- The inter-generational fairness of tackling the illness in this way;
-- The fact that the costs of suppression are certain to be big, and the possibility that they are unsustainable;
-- The fact that society routinely faces difficult and life-changing decisions, including those involving spending on healthcare;
-- Whether Sweden's alternative approach - which seems to have the support of a population that often favours bigger government - is sustainable (amongst the international community, as well as domestically); and 
-- Possible exit routes from suppression (by advisors in Italy and the UK).

We still think the length of this downturn may be measured in weeks or months, not quarters or half-years. We think this because those contagion figures may slow, and because public and governmental resolve may weaken.

If so, those tactless comparisons with the Depression (as all such comparisons are) may prove misleading. Yes, some indicators may fall as far as then; but they are very unlikely to stay there for long. Lockdowns may start to loosen before June, and the economic indicators may start to revive in the summer.

When we get back to "normal", or indeed whether "normal" exists any more, may prove less important to forward-looking capital markets than the likely direction of travel. Our own guess is that lasting damage may be contained, and that the future may look less different to the past than the op-ed writers assert.

It is still too soon to say whether stock markets really are starting to "look across the valley", but we think they will at some stage, and as long-term investors we should stay positioned accordingly.

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