The COVID-19 crisis was initially considered to be likely to cause only a brief and modest downturn but, as social distancing measures have become widespread, growth expectations have deteriorated markedly and the impact on financial markets has been dramatic. The downturn in economic activity, where large segments are essentially ceasing all productive activity, is leading to aggressive action by policymakers. They cannot prevent the downturn – indeed, government policy is causing the slump – but there are concerted efforts to prevent a long-lasting economic malaise. In addition, central bank policy is focused at easing financial stresses, particularly in credit and funding markets.
Policymakers are desperately trying to ensure that businesses remain solvent through this period of stress, are attempting to ensure that funding markets remain open and are attempting to mitigate the severe drop in demand being induced by the direct and indirect impact of social distancing measures. In short, they are resolved to prevent this economic shock creating severe lasting damage and, in the worst case, a depression.
For optimists, history may suggest that a bear market driven by an exogenous shock such as the current pandemic may be both milder and shorter-lived than those resulting from either a ‘conventional’ economic downturn or a financial crisis. Nonetheless, the challenge for policymakers today is that monetary tools, in terms of easing of rates, are all but exhausted and fiscal mitigants will not prevent a very deep and substantial recession. We simply do not, as yet, know the lasting damage that will be wreaked through rising unemployment and widespread bankruptcies, regardless of policy mitigants.
For investors, there is a recognition that policy action will not prevent the downturn and it does appear that news flow on COVID-19 will continue to deteriorate in the short term.
We cannot tell when the current crisis will end but we face a deep economic recession and earnings downturn. Investors are questioning whether policy action will be effective in helping to shore up economies, as it has been historically. They are also closely monitoring the spread of COVID-19 and, here, there is some hope that a moderation in the pace of new cases in China and, tentatively, some European countries may indicate that containment measures are effective. Nonetheless, while the downturn will be painful, markets have moved a long way to discount the bad news which is yet to come on the economy and on corporate profits.
Amidst the steep declines, provided that the recession and earnings downturn is reasonably short, there are signs of value in equity markets. The bottom in the market will probably be seen before the news flow stops deteriorating but will be likely be characterised by a combination of the following observations.
- An observed peaking in infection rates globally and a greater sense that the virus is under control.
- Valuations providing material support to asset prices.
- Confidence that monetary and fiscal policy will prove effective in mitigating (to some extent) the inevitable downturn.
- Some stability in market volatility and alleviation of forced selling/liquidations.
The portfolio has not been immune from the sharp downturn in asset prices. Indeed, recent weeks have presented the Trust with its most challenging conditions since the Global Financial Crisis. Nonetheless, our robust capital structure provides tremendous advantages from which to endure difficult markets. Being closed ended means we do not have to deal with portfolio flows which can lead to the inopportune sale of lowly valued assets in times of stress. We can afford to take a long-term view. We also prudently provisioned revenue during the recent bull market, building our revenue reserves to provide for any future shortfall in income. Despite the current market turmoil, we remain extremely well positioned, with a diversified underlying portfolio and a robust capital structure. Having paid a dividend every year since 1868 we remain confident of extending our record of dividend payments for shareholders, indeed we intend to deliver another rise in dividends – our 50th consecutive rise – over the course of 2020.