There is no doubt that we are living (and investing) in extraordinary times. A global pandemic grips the world and dystopian projections of an apocalyptic afterlife ring somewhat more plausible as businesses are forced to shutter, and individuals to "socially isolate". That the virus appears less deadly than Spanish flu, Sars and Ebola is of little solace to those that do catch it, for whom the symptoms are very real, or indeed those medical professionals on the front line, who are doing extraordinary work in difficult conditions. It is a brave thing to go to work in the most infected places in the nation every day, when we still do not know all there is to know about this virus, and where they will see people die from it daily. Investing in this market is difficult, but providing personal care to those who are in need of it is harder. And braver.
While keeping the human side of the virus in mind, we must also consider the economic implications, which requires a more detached and objective analysis of the data. To this end, we have been tracking the spread of the virus daily, watching not only cumulative case growth, but also the rate of change across different regions and countries. We have read the advice given to government and the academic literature supporting it. We have modelled case growth for different regions and countries, and compared these models with available hospital beds to assess the potential stress on the healthcare system. We understand that the virus tends to spread more effectively in cool and dry climes (most cases can be found between 30- and 50-degrees north of the equator), and that the infection rate is 2.5, hence the global spread and exponential growth in confirmed cases.
Notwithstanding the fact that the official numbers likely under-represent the true number of cases, there is a certain predictability to the virus' spread. However, the global economy's infinite complexity makes accurate prediction of the short term effect of the virus almost impossible. What we can say is that we expect we are already in recession and that the contraction will be sharp and significant (see recent flash PMI data, and the March 26th US jobless claims data). We know policy makers are doing everything they can to keep the economy on as even a keel as possible, and that, as a result, the line between fiscal and monetary policy is becoming increasingly blurry. And while there is something of a warlike mentality of all coming together to vanquish this invisible existential enemy, we do not know how (or whether) society's reaction will change as time passes; how long will people give up their individual right to freedom for the benefit of the collective, and at what point does the social contract break down?
These are big questions, some of whose answers can take us back down that dystopian road to rebellion and individualism. However, we take comfort from the fact the world has been here before, and believe the most negative of outcomes are highly unlikely. We anticipate some things will change (working practices), others trends will be hastened (offline to online retail (including grocery), de-globalisation of supply chains, the trend to paperless money) and some things will remain the same (democracy as the political system of choice). As always, we are looking for businesses that will benefit from, adapt to and be financially sustainable through a changing environment. This now includes the very real possibility that the behaviour of individuals, companies and governments will change in the future, impacting not only the supply side of the economy but also the service industries that have become such a feature of the developed world. And at an Asset Allocation level, when we have some visibility on the impact all this is having on corporate earnings, and some greater confidence that we understand both the path of the virus and of the government response to it, we remain of the view that the next move will be to add risk.