This article first appeared in the Telegraph
I expect the seasonal stock market adage about selling in May and going away will get a good airing this year. After a spectacular recovery in share prices in April, the disconnect between stock market valuations and persistently gloomy economic and corporate news is striking. Investors are generally rewarded for looking through near term challenges to the sunlit uplands beyond, but their exuberance last month is starting to look, to coin a phrase, irrational.
Six weeks ago, the pendulum appeared to have swung too far the other way. My view then was that the coronavirus outbreak would provide a temporary if spectacular hit to the global economy, followed by a rapid rebound. Unlike with, for example, the Japanese earthquake and tsunami in 2011, the world’s economic infrastructure and supply lines had not been damaged. Demand would quickly revive once lockdowns were lifted and we got back to work. This V-shaped economic trajectory argued for a commensurately quick market recovery. The retrieval of around half the losses endured between February and March suggests I wasn’t the only person to take that view.
It all looks a bit more nuanced now as it becomes clear that the end of lockdown will not be a light-switch moment. It is now obvious that we are not going to return to the old ways any time soon. We may come to view the familiar routine of getting on a train in the morning to go to an office like those sepia-tinted pictures of a man waving a flag in front of a car. In the absence of a vaccine or significantly better testing capabilities than we’ve managed thus far, the thought of going to a football match or eating out will be a misty-eyed memory of life before Corona.
The principal reason for my more pessimistic view of the economic outlook is the nagging doubt that this is a crisis of demand, not supply. Initial fears that lockdowns would be impossible to police proved unfounded because many people have been more than happy to distance themselves. There has been no need, in the main, to enforce isolation because we are choosing it. A recent trading update from Next, the clothes retailer, showed its dramatic drop off in sales pre-dated the stay at home edict.
This is bad news for the economy as a whole because even those of us who are fortunate enough to be able to work from home conduct most of our economic lives in environments that depend on the possibility of physical proximity. We shop, play sport, eat out, go to the dentist, travel, stay in hotels. Or we did. My previous assumption of ‘re-open and they will come’ may have been premised on an out of date view of human behaviour.
The real concern for many of the businesses meeting these basic needs is that their models were marginal in the old world of near capacity utilisation. In the new world, they are unsustainable. A restaurant operating under social distancing rules is not viable for so many reasons. Half as many tables means sharply lower turnover will not cover fixed costs, even assuming anyone wants to eat in such a sparse and sanitised environment. And that’s before you’ve worked out how to run a kitchen with two metres between your staff.
Which means the crisis is about solvency, not liquidity. The prompt, massive and unprecedented government and central bank support packages that gave investors hope in April may be fighting the wrong battle. Providing a low-cost loan or paying staff costs in the short term is a sticking plaster solution for a company whose customers have disappeared. Of the three concurrent crises afflicting markets today, it is not the medical nor the financial but the economic one that investors have underestimated.
From an investment perspective, what is more interesting than what happens over the next year, is what permanent social and economic changes the Corona-crisis may trigger. If I were a real-estate investor, I would be seriously questioning the future of my office and retail investments. Many of us feel more connected with our teams today than we did in the dispiriting environment of hot desks that the modern office has become. As a colleague recently put it, the dam has burst on objections to home-working. As for physical shopping, who won’t now view a trip to the shops as a relic from the offline past. More profoundly, one might question the pre-eminence of cities in a world where their primary attraction, social concentration, is increasingly viewed as a liability.
Maybe this is all nonsense. Another possibility is that in 18 months’ time, when we’ve all been inoculated with the new wonder vaccine, and we are laughing at the memory of crossing the road to avoid our neighbour, we’ll be flying and working and shopping and drinking together as we always did. Extrapolating the recent past is a common investment mistake. And if you do sell in May, don’t be surprised if the market doesn’t wait until St Leger Day to price in that brighter future.
Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.