4th May 2020
In April, the virus ended the lives of over 190,000 people across the world. Of those, 13% were in the United Kingdom, nearly 25,000. The UK has been one of the worst affected countries during this pandemic. The US has suffered a similarly heavy death toll, with nearly 58,000 deaths recorded with the coronavirus as a cause.
It seems remarkable that, as we enter May, an end to ‘lock-down’ is either underway or being considered. Many will think it not just foolhardy but morally wrong. Yet the slowing of the rate of change in underlying cases and fatalities is allowing the discussion to progress.
Earnings: is optimism getting ahead of reality?
The grim realities of this global pandemic become clearer by the day – economically as well as in health terms. Businesses and individuals are struggling with vanishing revenues en masse, becoming reliant on emergency loans and other government measures. As such, the prospects for company earnings have nosedived around the world (except for a few lucky superstar businesses like Amazon). And yet, equities – whose value is supposed to be determined by the underlying earnings – have continued to soar. Is this a case of ‘buy the rumour, sell the fact’?
Inflation primer: the three key pillars to consider
As long-term investors, our key focus during this enforced lockdown is what happens on the other side. We are in a deep recession, but this short-term pain is not the main determinant of current asset prices (as explained previously). Rather, it is when the global shutdown will end, and what will change once it does. Regular readers will know that, once we are on the road to recovery, we expect the current crisis-fighting stimulus policies to lead to higher inflation as the economy picks up and there is less spare capacity. If that is correct, there would be much more upside in equities – which have a natural protection against inflation – than bonds.