COVID-19 Update and Market Commentary from Lycetts Financial Services

Equity markets collapsed by around a third following the realisation of the potential effects of the global pandemic. This was largely down to the shock of output or production falling by some 66%, with other areas such as transport falling by 72%. Most clouds have a silver lining and gold and silver have done well, as have tech stocks, such as Microsoft, and pharmaceuticals etc. Workers have had either the most or least amount of work they have ever had.

This pandemic induced recession has brought about activity decline at a pace not seen since the Great Depression and this was accelerated by the collapse in the price of oil and a distortion of supply and demand. The oil war between Saudi Arabia and Russia has meant that the pumps keep pumping whilst there is reduced demand and no more storage resulting in negative oil prices for the first time.

The focus has been on the number of deaths and reproductive rate of infection (the R rate) and measuring the effectiveness of lock down in curtailing the virus. Numbers in Italy, Spain and France have reduced significantly over recent days and the attention is now shifting to how to progress out of lock down and return to work. Boris Johnson’s “conditional plan” for lifting England out of lock down highlights that the balance between reopening the economy and safeguarding the country’s health simultaneously create more short term questions than long term answers.

China is coming out from lock down and will be ahead of the curve and able to benefit whilst the rest of the world is still locked down. Mike Pompeo on behalf of the US Government has stated that there is “increasing evidence” that the pandemic emerged from a Chinese laboratory. President Trump’s view of China is that it is a global pariah, a vastly ambitious autocratic communist state with a long term plan, huge investment in Africa and now South America and one that does not necessarily share the same values as the West. This could lead to the resumption of USA/China trade wars which would not be helpful!

Government and Central Bank response has been absolutely huge and the headline numbers still underestimate the true extent of the support packages, which in some cases could be up to 30% of GDP. This has undoubtedly stopped the panic and mass hysteria but economic recovery will need consumer and business confidence and that has been shaken to the core and it won’t be possible to simply resume where we left off. Also, how are Governments going to pay for all this stimulus if not through taxation or inflation?

Markets have bounced back by up to 28% in some cases but there is still uncertainty regarding the shape of the recovery. Are we on the way up a V shape or is this part of the W shape in a classic bear market? Such unknowns are likely to lead to continued short term volatility, which for investors with a specific investment time frame or low capacity for loss may give consideration to the merits of using a structured product. A structured product looks to combine protection from stock market falls with the ability to generate positive returns in flat or sometimes falling market conditions. It is typically linked to the performance of a known index, for example the FTSE 100, with some or all of the initial investment capital protected and a defined return linked to the gains the market experiences over a set period of time.

The short term crisis should not be allowed to take away from long term planning and opportunities, for example early tax year planning and also Inheritance Tax planning, particularly under the current regime – it won’t get any easier and have your financial objectives really changed?

As always, if you would like to speak to us about any of the above or would like further help or advice, then please do not hesitate to get in touch with your usual Lycetts contact.