Five months after the UK first went into lockdown, work and social activities are trying to return to everyday life, albeit at a social distance. However, over the timeframe, as a global community, we have developed a greater level of knowledge of coronavirus including what is required to reduce the risk of infection, and what measures governments and central banks have at their disposal to keep the economy afloat whilst managing the spread of the disease. Markets have reflected this in positive returns since the lows in March. Reflecting on those unique days in March, it is no surprise that the markets fell so hard as investor risk appetite plunged, driven by the 'fear of the unknown' combined with genuine concern about the number of deaths that the virus may cause. The range of potential outcomes in March was certainly wide but this has reduced due to two main reasons.
Medical research and experience of the disease over the year to date has led to a better understanding of how to treat it. We are led to believe that great strides have been made over the last month in developing a vaccine and cheap and readily available steroids such as dexamethasone have proven an effective measure, cutting deaths by a third for patients on ventilators. The feared potential ventilator and critical care hospital bed shortage has been averted (at least for now). Facemasks, hand sanitiser and plastic screens in communal areas are being widely used, allowing the economy to gradually re-open, although we watch with great interest the regional spikes in Covid-19 and the government’s attempts to control them. The race for an effective vaccine is gathering pace with seven vaccines in phase 3 (the final phase before approval) currently being tested in large-scale trials.
The second key reason is the intervention from governments and Central Banks. Unlike in March when we were unclear how far governments would be prepared to go in terms of fiscal stimulus, we now know that the response has been unprecedented. Governments across the globe have gone to great lengths to stimulate demand, keep companies afloat and prevent individuals from losing their jobs. The fiscal response has been far greater than anything we saw in response to the Global Financial Crisis in 2008, which could help to push markets higher.
There remains plenty of work to do in order to control the spread of the virus; most notably, the development of a decent track and trace system in the UK. There is also the possibility that a vaccine will not work as the panacea that the public anticipates. Therefore, we are not suggesting that we are out of the woods with regard to the virus or that we expect markets to go up in a straight line from here. However, we do believe there are reasons to be cautiously optimistic if you are invested in certain areas such as high-quality global equities, gold, Asian equities and have a healthy allocation to US Treasuries. As the dispersion between the underlying fundamentals and the stock market continues to widen, it is also worth remembering the current economy does not always dictate the direction of the forward-looking stock market. We continue to run our portfolios with a healthy mix of sensible caution and future optimism. We do believe that the market is currently presenting us with some very attractive assets for the longer term, at discounted prices.
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