New article from Tatton Investment Management: Unprecedented quarter or calm before the storm?

6 April 2020

This week marks the end of the first quarter of 2020. Rarely if ever does it happen that one news story swamps all else as much as the coronavirus pandemic has, but in the future we probably will not remember much else about the last three months. The economic and financial news stories and outlook pieces at the beginning of the year hardly seem relevant now, but it is worth looking back – if only to put this crisis (and what might happen when it subsides) into context.

Even before the first case of coronavirus made headlines, the global stock markets were in a precarious position. Global growth slowed notably in 2019 and, while there were some promising early signs of a recovery, we were still waiting for tangible improvement. This was in stark contrast to the mood in capital markets, which seemed to be banking on the renewed monetary push from central banks of Q4 2019 and a steadily rebounding global economy showing up in the economic data flow.  Easing trade tensions between the US and China, plus the manufacturing sector coming out of its third midcycle slowdown of the past decade, had many investors decidedly bullish. As a result, the equity rally that had been building since the Autumn continued, despite corporate results not (yet) living up to lofty expectations.

This led to concerns that if rebound expectations were delayed, then equity valuations (price-to-earnings-ratios) were becoming quite stretched and vulnerable to corrections. As has repeatedly been the case in recent years, this was coupled with a general anxiety that the longest business cycle ever had to end sooner or later, bringing down the ten-year bull market with it. We, like others, pointed out that economic cycles do not die of old age: they end because of central bank action (either forced or through error) or external shocks. As long as the business environment remains stable, and markets have enough liquidity, growth keeps on going.

At Tatton, we took a cautiously optimistic stance, keeping portfolios broadly in a neutral position, but with a 3% overweight towards Emerging Markets and in particular China, where a massive fiscal stimulus package was being put together.

Of course, we all quickly learned that the mother of all external shocks was just around the corner. After initially brushing off coronavirus as a problem on the other side of the world, which was based on the historical experience of the first SARS virus outbreak in 2003, on 20 February, markets realised the potential gravity of the situation. Over the next month, the S&P 500 lost 34% of its value, and all the world’s major equity indices entered official bear market territory (defined as a stock market decline in excess of 20%). Government orders shuttered the global economy, ending the longest expansion cycle in history, and plunging us all into a deep recession.

To make matters worse for markets, two of the world’s largest oil producers – Saudi Arabia and Russia – decided they could no longer deal with the supply glut that had been building through production cut compromises – resulting in a hugely untimely price war. This sent crude oil into free-fall and left energy producers (who usually provide market support through large capital expenditures) uncertain about their ongoing ability to service their capital, be it debt or equity. It resulted in crude oil’s worst quarterly performance on record, as shrinking demand was met with burgeoning supply – almost maxing out storage capacity. We cover this in a separate article below.

Initially, the market reaction could have been described as rational, stock markets fell by around 10% as investors revised their expectations. Safe-haven assets like gold and government bonds initially shot up, with bond yields (the inverse of price) sinking to historic lows. But the sell-off worsened, which led to a self-perpetuating downward spiral. When shoppers began panic-buying staples such as toilet paper and hand sanitiser out of a natural urge to ‘do-something’, investors fell victim to a similarly irrational ‘sell anything that is liquid’ cash-grab mentality. For a while, even the safe havens suffered losses – the complete opposite of the 2008/2009 sell-off.  Most sectors of the economy were now feeling the pain – though far from equally. The chart below shows the sectoral breakdown of companies facing ratings downgrades


At the point when policymakers were weighing up the costs of a global economic depression and a virus death toll comparable only to the 5 million deaths caused by the 1918-1920 Spanish Flu pandemic, governments and central banks stepped in to make clear they would “do whatever it takes” to prevent such an outcome. Central banks acting as the unlimited ‘buyer of last resort’ in capital markets decisively ended the ‘dash-for-cash’ spiral. Fears that capital markets would saddle global society with a financial crisis on top of the health crisis were decisively quelled.

In combination with government support measures aimed at preventing the unintended consequences of a complete economic shutdown, this calmed investors’ fears of a complete and lasting economic meltdown. While corporate earnings prospects for 2020 remain dire or at least completely uncertain, the likelihood of a collapse of the corporate debt markets now appears more limited.

In terms of recovery hopes, the main shining light has been the sheer size of the support measures undertaken. The US Federal Reserve led the way by lowering overnight rates to zero and pledging virtually unlimited funding for buying government debt and even private sector credit, which is a novum for the US. An international USD shortage was addressed by extending USD swaps to the central banks of 14 countries. Other central banks took similarly unprecedented measures and, crucially, governments took the opportunity to unleash a wave of fiscal bridging support and stimulus for the time when economic activity restarts.

In the UK, emergency government spending measures will cost around 2.5% of GDP (depending on the uptake of the furloughed worker scheme). A further £330 billion of business guarantees and loans should help steady the ship for the rough ride ahead. In the US, the Senate passed an emergency response bill of just over USD 2 trillion, equivalent to 9% of GDP. 

The European Union (EU) has yet to settle on a coordinated fiscal response, but most major economies, including Germany, announced substantial measures to see workers and businesses through. These measures are almost entirely to be paid for by government borrowing, which itself can be ‘monetised’ by central banks’ extraordinary measures if required to keep interest rates and longer terms yields steady. In effect, central banks have been authorised to print/create money for governments to use in short-term emergency spending. That may indeed cause problems further down the line, but as global policymakers have almost all realised, right now, there is simply no other choice.

When looking at the numbers, comparisons to the financial crisis – or even the great depression of the 1930s – are not hard to find. But rather than reeling off scary statistics, the key question is: how bad will the damage be? The answer to that depends on how long this forced hibernation lasts, and what the authorities do in response.
While China’s re-emergence after barely eight weeks of social distancing and shut-down are encouraging, neither the US and Europe has reached the ‘peak’ of the virus and may not for some time. However, the quick and decisive economic response from governments is encouraging. In an ideal scenario, measures would be perfectly timed and targeted to get just enough money to keep businesses and individuals tied over so they can resume their usual spending patterns once the lockdown is lifted. In that ideal case, we would see a sharp V-shaped recovery, where growth returns exactly as before.

Of course, in the real world, perfect timing and targeting are not possible. Some businesses will suffer irreversible damage, bankruptcies will rise and so too will unemployment. If the collateral damage proves too much, a prolonged ‘U-shaped’ recession could set in (or, in the extreme case, the dreaded ‘L-shaped’ permanent deterioration). But given the measures already in place, there will be winners too. The emergency fiscal and monetary measures may last longer than the lockdown itself, after which the added stimulus could lead to a strong rebound – particularly if pent-up demand comes out all at once. As outlined before, in that case an overshoot on growth and inflation seems more probable than a prolonged downturn.

Or in other words, monetary and fiscal policy can play a crucial role in limiting the collateral damage, but pandemic and virology science will determine the timing and success of the recovery. Whatever the case, the determination to avoid economic disaster is clear among policymakers. There are certainly challenges to overcome on that front (Germany and the Netherlands’ blocking of the Eurozone ‘coronabond’ being a prime example).

‘Tumultuous’ would be an understatement when describing the first quarter of 2020, ‘unprecedented’ captures reality more adequately, but is also a frightening adjective.



The table of asset class returns for the quarter isn’t pretty, but it conveys the pain that investors have endured since the year began. However, the three and five year annualised figures also show that the longer-term investment time horizons that our portfolio investors base their planning on have not been disproven, in spite of the first quarter’s events. The returns also illustrate why diversified investment portfolios, made up of holdings across many asset classes, generate significantly less extreme returns when compared against single asset class investments.

The levels at which the crash left stock market valuations at quarter-end reflect investor uncertainty and negative expectations around both the global economy and corporate results in the near term. However, compared to the lower levels plumbed just a week before the quarter ended, concerted actions taken to protect economies and private households have created something like a ‘safety net’, which appears to have been accepted as averting the very worst outcomes – including a full-blown financial crisis.

For now, capital markets have stabilised and there is a healthy improvement of sentiment based on the good that can come from the sheer size of intervention packages over the longer term. That said, even the boldest policy actions cannot prevent the misery that the coming weeks and months will bring – not only to those affected by the virus itself, but also in the economic collateral damage brought in by the social distancing measures aimed at limiting the loss of human life.

We should remain realistic and accept that as long as virologic or behavioural science cannot provide a more definitive time frame for the economic suppression, then assessments of the likely economic cost, and thereby justified discount to stock market valuations, remains impossible.

As the shut-down progresses, the economic pain of individual corporate defaults and the ‘scaring’ from mass-unemployment (and underemployment), are likely to depress market sentiment again. This bear market is therefore likely to progress along the lines of historical precedent, with the crucial difference that if any form of medical advancement is found, forward expectations can improve just as rapidly. Overly active portfolio management in such an unpredictable environment remains challenging, but also carries the prospect of generating long term value.

Tatton’s investment team is therefore decidedly busier than most employees around the world. In our investment committee meeting next week, we will determine the future course of portfolio activity.

We are satisfied with the way we constructed risk-profiled, diversified portfolios for our clients, and  that we held our nerve in what bordered on emotional market chaos around us. Our response ensured clients remained within the boundaries of what their risk profiles suggested to be possible and to be expected. While we are saddened for clients by the overall poor capital market returns, we do hope and believe that this 2020 market crash has born fewer surprises than many clients experienced during the 2008/2009 bear market, before Tatton was managing their investments.

 

News Archive

18 December 2020

New article from Tatton Investment Management: Goodbye to all that

14 December 2020

New article from Tatton Investment Management: Outlook 2021 - no deal Brexit?

4 December 2020

New article from Tatton Investment Management: December concerns over baubles and bubbles

27 November 2020

New article from Tatton Investment Management: Fiscal floundering

20 November 2020

New article from Tatton Investment Management: More tunnel before the light

18 November 2020

Interim Results For The Six Month Period Ended 30 September 2020

13 November 2020

New article from Tatton Investment Management: Change is in the air

6 November 2020

New article from Tatton Investment Management: Looking beyond the obvious

4 November 2020

New article from Tatton Investment Management: US Election Update

2 November 2020

New video from Tatton Investment Management: US election, the response to the pandemic and Brexit

30 October 2020

New article from Tatton Investment Management: Unsettled week ahead - or behind

26 October 2020

New article from Tatton Investment Management: Sunlit uplands or COVID gorge?

19 October 2020

New article from Tatton Investment Management: Watching and waiting

12 October 2020

New article from Tatton Investment Management: Baffling market optimism

2 October 2020

New article from Tatton Investment Management: A question of time horizons

25 September 2020

New article from Tatton Investment Management: A recovery on hold

18 September 2020

New article from Tatton Investment Management: Taking a step back to look forward

14 September 2020

New article from Tatton Investment Management: Frictions and contradictions

7 September 2020

New article from Tatton Investment Management: Market dynamic of a K-shaped recovery

1 September 2020

New article from Tatton Investment Management: Big tech gets bigger while the Fed takes the easy opt

24 August 2020

New article from Tatton Investment Management: Fed leaves bond investors with that sinking feeling

17 August 2020

New article from Tatton Investment Management: COVID II the sequel - as scary as the original?

10 August 2020

New article from Tatton Investment Management: July brings consolidation

2 August 2020

New article from Tatton Investment Management: Sunshine and shadows

27 July 2020

New article from Tatton Investment Management: PPE = Politics, Pressure and Economics

20 July 2020

New article from Tatton Investment Management: Discomfort of disappearing safety nets

13 July 2020

New article from Tatton Investment Management: Fast and freewheeling

3 July 2020

New article from Tatton Investment Management: H1 2020 offers meaningful lessons

29 June 2020

New article from Tatton Investment Management: Support balances increasing strains - for how long?

22 June 2020

New article from Tatton Investment Management: Equity valuations follow bond valuations' lead

15 June 2020

New article from Tatton Investment Management: Stock markets suffer altitude sickness

8 June 2020

New article from Tatton Investment Management: Markets are enjoying an uncomfortably benign pandemic

1 June 2020

New article from Tatton Investment Management: Optimistic markets despite second wave lockdown threa

26 May 2020

New article from Tatton Investment Management: Just as the sun comes out, clouds appear in the East

22 May 2020

New video from Tatton Investment Management

18 May 2020

New article from Tatton Investment Management: Us-China cold war: Threat or blessing?

11 May 2020

New article from Tatton Investment Management: Most welcome, if feeble, signs of pulling together

4 May 2020

New article from Tatton Investment Management: Opening-up will be slower than locking down

27 April 2020

New article from Tatton Investment Management: V or U-shaped recovery scenarios - the jury is out

20 April 2020

New article from Tatton Investment Management: Lifting lockdown remains a delicate balancing act

20 April 2020

New video from Tatton Investment Management: Stock markets between hope and despair

15 April 2020

New video from Tatton Investment Management: Is now the time to invest?

13 April 2020

New article from Tatton Investment Management: Fading threat of financial crisis re-opens old divide

6 April 2020

New article from Tatton Investment Management: Unprecedented quarter or calm before the storm?

30 March 2020

New article from Tatton Investment Management: Extraordinary: bear and bull market all in one

24 March 2020

New video from Tatton Investment Management: Why have stock markets appeared to rally on the lock-do

23 March 2020

New article from Tatton Investment Management: Government ordered recession

19 March 2020

New video from Tatton Investment Management: Confusion reigns in Capital Markets

18 March 2020

New article from Tatton Investment Management: Why aren't you doing something?

17 March 2020

New video from Tatton Investment Management: From euphoric recovery to depressed tumble

16 March 2020

New article from Tatton Investment Management: Notes on a crash: the short, the medium and long term

13 March 2020

New video from Tatton Investment Management: Panic equity selling or panic raising of precautionar

12 March 2020

New article from Tatton Investment Management: Forced sellers and other distractions

9 March 2020

New article from Tatton Investment Management: Dark times or glimpse of light at the end of the tunn

6 March 2020

New article from Tatton Investment Management: News of a reverse oil price shock rattles markets bey

2 March 2020

New article from Tatton Investment Management: Coronavirus - hitting too close to home

28 February 2020

New article from Tatton Investment Management: This week's market correction requires perspective

26 February 2020

New article from Tatton Investment Management: COVID-19 and the reaction of markets to pandemic fear

24 February 2020

New article from Tatton Investment Management: US markets hit new all-time highs and a 'bump'

17 February 2020

New article from Tatton Investment Management: V-shaped recovery for Valentine

10 February 2020

New article from Tatton Investment Management: Markets show no fear - should they?

3 February 2020

New article from Tatton Investment Management: Looking through the noise of the week

27 January 2020

New article from Tatton Investment Management: Short break to Goldilocks?

20 January 2020

New article from Tatton Investment Management: Parallels and differences to January 2018

14 January 2020

Appointment of Joint Broker

13 January 2020

New article from Tatton Investment Management: So far so good

8 January 2020

Tatton: Woodford & M&G suspensions have driven IFAs to us

6 January 2020

New article from Tatton Investment Management: 2020 starts with a Trump card

23 December 2019

New article from Tatton Investment Management: Goodbye 2019 - welcome 2020 and a new decade!

16 December 2019

New article from Tatton Investment Management: Brightening horizons - 2020 Outlook

8 December 2019

New article from Tatton Investment Management: Can Trump derail the 2020 economic upturn?

2 December 2019

New article from Tatton Investment Management: Markets are driving the markets

25 November 2019

New article from Tatton Investment Management: Markets pause for reality check

18 November 2019

New article from Tatton Investment Management: Swilling cash eases the market mood music

11 November 2019

New article from Tatton Investment Management: Recession concerns retreat

11 November 2019

Interim Results for the six months ended 30 September 2019

4 November 2019

New article from Tatton Investment Management: Crucial October period safely behind

28 October 2019

New article from Tatton Investment Management: Slowly turning

21 October 2019

New article from Tatton Investment Management: Brexit breakthrough versus Brexit fatigue

17 October 2019

Trading Statement

17 October 2019

Acquisition of Sinfonia Asset Management Limited (SAM)

14 October 2019

New article from Tatton Investment Management: Market sentiment rebound

7 October 2019

New article from Tatton Investment Management: Stall speed economy fears spreading

30 September 2019

New article from Tatton Investment Management: Ominous US-Dollar strength

23 September 2019

New article from Tatton Investment Management: Diverging economic trends - catalyst for trade war re

16 September 2019

New article from Tatton Investment Management: Market sentiment rebound

9 September 2019

New article from Tatton Investment Management: Choppy water but no storm, yet...

2 September 2019

New article from Tatton Investment Management: Fattening 'tails'

27 August 2019

New article from Tatton Investment Management: Populism politics reversing austerity?

19 August 2019

New article from Tatton Investment Management: Market spat between bond and equity markets

11 August 2019

New article from Tatton Investment Management: Bond markets unnerve equity markets - again

5 August 2019

New article from Tatton Investment Management: The Elephant and the Little Old Lady

29 July 2019

New article from Tatton Investment Management: The quick and the not-so-quick

22 July 2019

New article from Tatton Investment Management: ...'Twere well it were done quickly

15 July 2019

New article from Tatton Investment Management: Positioning for a summer of wait and see

8 July 2019

New article from Tatton Investment Management: Liquidity drives stock markets to new highs

1 July 2019

New article from Tatton Investment Management: The middle of the year - a tipping point?

24 June 2019

New article from Tatton Investment Management: Battle of the ‘doves’

17 June 2019

New article from Tatton Investment Management: Mixed messages

10 June 2019

New article from Tatton Investment Management: The return of the central bank put?

3 June 2019

Appointment by Tenet Group

3 June 2019

Appointment by Frenkel Topping

3 June 2019

Preliminary Results For the year ended 31 March 2019

3 June 2019

New article from Tatton Investment Management: Bond rally musings

27 May 2019

New article from Tatton Investment Management: It is getting warmer

20 May 2019

New article from Tatton Investment Management: Market support for Trump or unwarranted equanimity?

13 May 2019

New article from Tatton Investment Management: Geopolitics re-enter market stage

7 May 2019

New article from Tatton Investment Management: Central banks disappoint expectations

29 April 2019

New article from Tatton Investment Management: Waning market stimuli put stock markets on notice

23 April 2019

New article from Tatton Investment Management: Spring time from here?

16 April 2019

Trading Statement for 12 months ending 31 March 2019

15 April 2019

New article from Tatton Investment Management: Brexit in-limbo aside sentiment is improving

8 April 2019

New article from Tatton Investment Management: Happy 10th birthday, choppy bull market

1 April 2019

New article from Tatton Investment Management:29 March 2019 – quarter end

25 March 2019

New article from Tatton Investment Management: Brinkmanship and extensions

18 March 2019

New article from Tatton Investment Management: Bits & Pieces

11 March 2019

New article from Tatton Investment Management: ECB stimulus U-turn leaves markets unimpressed

4 March 2019

New article from Tatton Investment Management: £-Sterling ‘applauds’ prospect of Brexit delay

25 February 2019

New article from Tatton Investment Management: Progress?

18 February 2019

New article from Tatton Investment Management: Investment perspectives for different Brexit outcomes

15 November 2018

Interim Results for the six months ended 30 September 2018

15 October 2018

New article from Tatton Investment Management: Autopsy of a stock market sell-off

1 October 2018

New article from Tatton Investment Management: Poor politics containing bond market risks?

27 September 2018

New article from Tatton Investment Management: Brexit clamour vs. real market new

7 September 2018

New article from Tatton Investment Management: Interesting times ahead

31 August 2018

New article from Tatton Investment Management: “Not the end of the world”

24 August 2018

New article from Tatton Investment Management: Steady markets vs. noisy politics

17 August 2018

New article from Tatton Investment Management: Political strongman tactics come home to roost

10 August 2018

New article from Tatton Investment Management: Summer heat wave makes way for return of political he

3 August 2018

New article from Tatton Investment Management: A gentle deceleration?

27 July 2018

New article from Tatton Investment Management: Hot air for a hot summer?

20 July 2018

New article from Tatton Investment Management:Earnings are growing, why worry?

13 July 2018

New article from Tatton Investment Management: Hard Brexit demonstration potential?

6 July 2018

Notice of Annual General Meeting

6 July 2018

New article from Tatton Investment Management: It is getting hot

29 June 2018

New article from Tatton Investment Management: Digesting or consolidating?

27 June 2018

Preliminary Results for the year ended 31 March 2018

22 June 2018

New article from Tatton Investment Management: Fragile recovery

15 June 2018

New article from Tatton Investment Management: No surprises

8 June 2018

New article from Tatton Investment Management: Delicate equilibrium

1 June 2018

New article from Tatton Investment Management: Ignore politics at your peril

25 May 2018

New article from Tatton Investment Management: GDPR? No - far more interesting news!

18 May 2018

New article from Tatton Investment Management: What's the economic reality of this week's news?

11 May 2018

New article from Tatton Investment Management: Batten-down-the-hatches?

4 May 2018

New article from Tatton Investment Management: Past the peak?

27 April 2018

New article from Tatton Investment Management: Confusing signals?

20 April 2018

New article from Tatton Investment Management: A mixture of messages

6 April 2018

New article from Tatton Investment Management: Could do better

6 April 2018

New article from Tatton Investment Management: Peaking, plateauing or dimming – and how about that

29 March 2018

New article from Tatton Investment Management: End of a stormy quarter

23 March 2018

New article from Tatton Investment Management: Now we know it's risky!

16 March 2018

New article from Tatton Investment Management: Back to Normal?

9 March 2018

New article from Tatton Investment Management: Tariffs to growth

2 March 2018

New article from Tatton Investment Management: Time to take some profits

23 February 2018

New article from Tatton Investment Management: Change of direction or gradual normalisation?

16 February 2018

New article from Tatton Investment Management: Breathing easier for the moment

9 February 2018

New article from Tatton Investment Management: Meteoric stock markets crash bac

6 February 2018

Tatton Investment Management's Stock Market Correction Assessment

2 February 2018

New article from Tatton Investment Management: Good news turns bad news - again!

26 January 2018

New article from Tatton Investment Management: Surprises

19 January 2018

New article from Tatton Investment Management: US$ weakness versus Bitcoin and Carillion

12 January 2018

New article from Tatton Investment Management: Bullish sentiment rings alarm bells

5 January 2018

New article from Tatton Investment Management: Encouraging kick-off

15 December 2017

New article from Tatton Investment Management: 2017 - taking stock

8 December 2017

New article from Tatton Investment Management: Progress versus Bitcoin

5 December 2017

Interim results for the six months ended 30 September 2017

1 December 2017

New article from Tatton Investment Management: Sudden, but not entirely unexpected

24 November 2017

New article from Tatton Investment Management: Invincible markets?

17 November 2017

New article from Tatton Investment Management: Yield-curve flattening: a bad omen?

10 November 2017

New article from Tatton Investment Management: Nervous investors herald more volatile markets

3 November 2017

New article from Tatton Investment Management: UK rate rise: ‘one and done’ or beginning of rate

27 October 2017

New article from Tatton Investment Management: Trick or treat season

13 October 2017

New article from Tatton Investment Management: All-time highs and Q3 results outlook: Reasons to be

6 October 2017

New article from Tatton Investment Management: Bad news – good news

29 September 2017

New article from Tatton Investment Management: Movements

22 September 2017

New article from Tatton Investment Management: QT to reverse QE and 2-year transition period to soft

15 September 2017

New article from Tatton Investment Management: BoE guides for year-end rate hike - Bluff or real?

8 September 2017

New article from Tatton Investment Management: ‘Back to school’ amidst hurricanes, earthquakes

1 September 2017

New article from Tatton Investment Management: Bad news, Good news

25 August 2017

New article from Tatton Investment Management: Summer low or summer lull?

18 August 2017

New article from Tatton Investment Management: More sellers than buyers

11 August 2017

New article from Tatton Investment Management: Stocks take note of North Korea crisis - or do they?

4 August 2017

New article from Tatton Investment Management: Consolidated base but momentum dwindling

28 July 2017

New article from Tatton Investment Management: Summer thoughts about the ‘longer term’

21 July 2017

New article from Tatton Investment Management: Summer lull - delayed

14 July 2017

New article from Tatton Investment Management: Pre summer-holiday investment check

7 July 2017

New article from Tatton Investment Management: Global growth ploughs on while markets take a breathe

23 June 2017

New article from Tatton Investment Management: Quo Vadis Britain?