Turning the Tide

Just a quick update on Covid19 referring back to one of my original emails in early March (below) where I first discussed the “game-changers” that I would be looking out for.

They were essentially:

1. Fading: Does the virus fade or slow down with the onset of summer (in the way that SARS and MERS did). It’s still too soon to say but my assessment hasn’t changed in that I still believe this will be the case and that by May/June we would have seen the worst of it.
2. Containment: To me it was absolutely vital from the start that we see evidence of lockdowns actually working. Italy was the first to accept full economic disruption in an attempt to contain the spread. It has taken about a month to see positive results. It now looks like Italy has in fact peaked, and Spain is potentially close behind. Italy’s daily deaths peaked close to 1000 and its latest number is 525. We cannot assume it’s over, or that deaths will continue to decline. We also don’t know the effect of re-commencement of normal activity. However, being rational about it: This point has to be labelled the plateau. This is positive news. The absence of this news would have been diabolical. It is a reasonable assumption to make that other European countries have the ABILITY to contain in similar ways, if they choose to. It’s also quite likely now that other major countries such as Germany won’t even get to the stage Italy got to. Market’s are reacting favorably to this news.
3. Cure/Vaccine/Treatment/Testing: Any medical/pharmaceutical progress was also outlined as vital and on this front we have seen positive developments. Every week that goes by without the pandemic becoming existentially threatening gets us closer to a point where a real break-through is achieved. Testing capacity  is increasing everywhere (that gives us the ability to at least partially function economically). Treatment is getting better, and we are learning from previously made mistakes. And of course we are closer to a vaccine every month – the estimate there hasn’t changed much (this is still likely at least 9-12 months away).
4. Africa and the developing world: This is still a factor that can potentially get a lot worse (particularly from a social point of view, rather than from a markets impact point of view). Places like South Africa will not benefit from summer as the northern hemisphere will, so we need to hope and pray that their containment efforts are working.

Updated market view:

• I still do not subscribe to the aggressive V-shaped recovery hypothesis. I believe as and when the threat of the virus fades we will gradually replace virus headlines with negative economic data points. We will be left with slowly unwrapping just how severe the medium-term economic impact is. I think a U-shaped recovery is more likely than a V, but most likely in my opinion is gradual stabilization, decreases in volatility, and slow recovery. Much of the ground lost over this period will take a couple of years to claw back (GDP contribution per capita, recovery of SME’s etc).
• As for my original call on levels and where the bottom is (referring again to my original view) I believed this would be a 25-30% correction. If things continue to stabilize that looks like it may have been spot on. But as I’ve already stated, I do not think that we race back to the top.
• I do still believe there are specific opportunities to take advantage of high quality names that have been impacted, and one can probably scale into those gradually more and more from here.
• The majority of the investments I personally manage (be it for clients or for my own fund) are likely to continue to be strategies that take advantage of elevated volatility, but continue to offer downside protection going forward (in line with my expectation that this will not be plain sailing from here on out). I have put on a few more trades in the last week which I am happy to discuss with clients case by case.
• As for calling the bottom: We still cannot say for sure that we have seen it, but it is rational to believe that we are fairly close either way. Perhaps we re-test 2200 on the SPX, perhaps not. My original absolute possible bottom for the SPX (2000), was not reached, and I think it is unlikely that markets drop 20% from here (at least not rapidly). So my advice remains the same: Don’t try to call the bottom; instead put on trades that you are comfortable holding through potential periods of volatility. Stick to high quality names that cannot default (this is far from over from a credit point of view) and don’t be greedy. I would not recommend being 100% allocated to equities despite the comparatively cheap levels we are seeing versus Jan this year. There is still every chance that the economic fallout from this is a lot worse than expected.

While the tone of this email is more optimistic than previous (which really just underlines the fact that we have finally had some good tangible news) let’s not forget that the USA is now entering its worst 2 week period for this pandemic. The headlines and numbers will be grim. I wish all my friends and colleagues in the States the best and hopefully we can look forward to these curves starting to flatten over the next few weeks.