COVID for the next 18 months

As of 12th April 2020, the FTSE is at 5842, and the S&P is at 2789. This represents draw-downs of 33% for both indices, with the FTSE down 20% and the S&P down 18%. Demand will be suppressed across retail, travel and energy. Consumer and business balance sheets have holes in that need to be recapitalised. In any scenario absent government funding, one would expect more significant declines. But with significant government support, it is difficult to tell how things will evolve. The biggest shifts were in the debt and currency markets, with USD swap lines broken and high yield debt not trading. These issues have largely been sorted out.

According to GS: “The three phases of US fiscal stimulus total about 11% of GDP. A fourth phase to supplement the Payroll Protection Program and provide additional funds for state and local governments and hospitals is pending. The Federal Reserve continues to expand its liquidity facilities to provide interim funding across a broad range of sectors in the US economy.” – including high yield debt.

Medium Term Evolution

  • Social distancing will have to remain in place for 18 months, limiting the recovery. Business is not going to get back to normal.
  • Global trade is going to be difficult when people can not meet
  • States are indebted.
  • People are poorer
  • We expect the monetisation of debt. It is not good to be in cash. Where do you want to be? Probably, in equity as a debtor.

A lot of support has been given to the market (corporate share buy backs, consumer and business spending). But then a lot of companies will go into insolvency and the winners will emerge much stronger.

Niall Fergusson talks about a tortoise shaped recovery  – not all demand is coming back. The recovery will be slow.

Long Term Effects

  • People have learned how to live in a new way, and some of that behaviour will not come back

Broadly speaking, more life can be remote:

– Commercial real estate demand  will move to show room style offices once people have been forced out of traditional hysteresis
– People that previously went to shops will do things online
– Events that previously happened in person will happen online

We’re not going back to normal
Don’t bet on a quick global resurrection

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