Market Update
April 3, 2020

What Can We Learn From War?

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Stocks were flat to down a little this week, which is not really surprising if one examines the ‘new’ checklist of things to watch. As a reminder, the new checklist for the markets to rally relates mainly to the virus and really pertains to how quickly the global workforce can get back to work:

1) Is the virus responding to lock down measures? Well, this morning the rate of change in new infections globally excluding China was 9% and this is down from 19% on 19th March. As of this morning, the US rate of infection was 13% versus 50% on the 19th March, both France and Italy had rates of 4% whilst Germany was at 9%. So it looks as if things are getting under control slowly although this morning it does look like Singapore has had to tighten restrictions. Therefore, one could give this first item a little ‘tick’.

2) Enforce a more severe lockdown on the old and vulnerable rather than the rest of the population. Well so far this has only happened in the UK, so no tick yet.

3) Mass availability of antibody testing so it is clear who is immune. According to the Daily Mail the US FDA has just issued an Emergency Use Authorization for the first coronavirus antibody test. So, it feels like something is happening here but it has not yet been rolled out and investors do not yet know the all-important number of people who have had the virus in the US.

4) Mass availability of conventional testing. Germany gets a big tick on this score but no other major country in the Western world does.

5) Good results from a drug trial testing potential cures. Investors have not seen anything yet in this respect, so no tick here either.

So, if one adds it all up it is no surprise that markets treaded water this week and traded with a downward bias especially since investors had to cope with so much bad economic news. However, the news was not bad enough to take all hope away of a return to work in May but also not good enough to make that a certainty.

What investors can do while markets are treading water is to think about how the world will look once the world at large has made it through to the other side. This week, the authors of this piece attended a virtual lecture hosted by The London School of Economics using Zoom. The speaker was the world-famous historian, Harold James of Princeton University.

The topic was whether investors could learn anything from war-time experiences and how economies changed as a result of going through those wars and thus whether any of this could be applied to the current plight.

The main points which were taken away are:

1) Investors might be at the end of the road for the long period of deflation.

2) Governments will have to increase taxes to get some of the money back which they are spending now.

3) There will be a general acceptance that the role of the state should increase.

4) Any government which can create a safe asset will enjoy spending freedom but those who cannot will suffer.  

So what does all this mean for portfolios?

Well, portfolios will still need to be well diversified, but the debate should shift to whether long bonds of all countries deserve to be in investors’ portfolios since yields are so low and, if anything, debt to GDP ratios look set to rise quite a bit.  If the world really does become short of safe assets then that should be very constructive for gold, which is no-one’s liability. Finally, if inflation does take off at some point, an allocation to inflation-linked bonds should help guard against unanticipated inflation.

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