As questions go, it’s a short one – just 6 words. However, anyone trying to answer it at the moment, will take a great deal longer, with liberal use of that word, ‘However’ being required! In recent weeks I have thought of COVID 19 and all its implications (not just financial), as being like going into a dark tunnel. For many, the impact will take years to recover from and for some, only the passing of time will make things a little easier. It does seem however as I write this article in the 2nd week of June, that there is now light at the end of the tunnel. Of course, our own and other’s wellbeing, depends on so many issues, but it would be naive to think that financial stability doesn’t play a role and that is why it’s not a binary choice between protecting public health or protecting the economy. It’s not as simple one or the other. There has to be a balance as an economy that is failing, has huge and far reaching implications on people. Yes, we might see reductions in the value of investments, pensions and property, however the impact will lead to increased unemployment, greater debt, greater poverty, more dependency on food banks, poorer health, a greater number of businesses failing and greater pressure on the public sector.
Back in March, we had no idea how long the dark tunnel was, we didn’t even know if it was different to any tunnel we’d experienced before. There wasn’t a guidebook as to what to expect, what would happen and what needed to be done and so it was little wonder that global stock markets (that notoriously dislike uncertainty), reacted in the way they did. In reality, with no crystal ball or hindsight, investment managers have to rely on knowledge and experience, which enables them to see changing events and react accordingly. I have always believed that in times of significant uncertainty and volatility, active investment management (having investment professionals making decisions on your behalf), rather than passive, really pays off. Yes, you will pay more in charges, but often during volatile times, these additional costs are nothing compared to the potential benefit of having someone ‘limit the damage’ that could ensue.
So, fund managers invest in companies. They do so in the hope that this benefits their investors, however in doing so, the company receives capital which enables them to continue production of a product, create new services, expand into new areas. This in turn benefits the staff they employ, the salary they earn, the taxes that are paid, the money that goes back into the economy and the jobs it creates. Maybe it also benefits other companies in the supply chain, maybe it benefits some of the functions of the public sector. Often investments are made into those leading innovation, finding new, more sustainable products or services. An active fund manager will consider many things before investing, such as who the company is, its reputation, plans, what sector it’s in and the impact – for example the company may be in Technology or Healthcare, both of which have been very resilient during the COVID 19 outbreak in recent months and therefore a positive influence on the S&P 500 in the US. However, they have probably avoided or reduced exposure to airlines, energy and financials (all of which are significant to the UK economy). They will also consider the reserves of any company, as the more secure a company’s balance sheet, the more they are able to withstand shocks. It’s worth remembering some sectors were in decline long before COVID 19, while some companies have moved swiftly to benefit. Ultimately, they will either Fail, Survive or Prosper.
So why is it difficult to know where we go from here? Well as the weeks have passed, a growing understanding of some of the impacts of COVID19 has emerged. As the number of cases and deaths has reduced, optimism has increased which has influenced a recovery of sorts in stock markets, but this perhaps creates more vulnerability to disappointing setbacks from here. So even if the worst is behind us, the economic indicators for the 2nd quarter have yet to fall into the hands of the media and it will be the 3rd quarter really, before we emerge from lockdown and influence the next 12 months. While income from shares will decline for the remainder of the year, the more optimistic point towards an improvement in 2021; be realistic about GDP and unemployment headlines and focus towards the end of the year and into 2021.
Author: Phil James, Grosvenor Consultancy Ltd
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