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March 2020

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Written by Graham Bentley, Avellemy Investment Committee Chairman.

As perhaps you might expect, I'm devoting this month's commentary to the impact of Coronavirus (COVID-19) and hope to provide clarity, versus the situation obfuscated by the wilder social media-generated conspiracy theories and occasionally sensationalist tabloid reporting.

Let me add some perspective.  As I write this* over 92,000 people have been infected - around the capacity of Wembley Stadium. Over 80,000 of those occurred in China, however this number includes over 48,000 people who have since recovered. There have been less than 200 deaths from the disease outside China; that's roughly the capacity of two coaches on a commuter train, and two-thirds of those have occurred in Iran and Italy. 85% of newly reported cases are confined to Iran and South Korea.  Again, the vast majority of reported cases are related to travel from infection epicentres, rather than contact with a local infected person. In the UK we have had 52 cases, 8 of whom have recovered, no deaths and indeed no active cases are categorised as serious.

The 'lockdowns' instigated in areas of the world with significant infection rates - and China has been particularly draconian in that respect - have so far prevented the disease from assuming pandemic proportions. However, despite the acceleration of testing and sanitisation procedures in the west, the disease remains a threat. While the recovery rate from the disease is currently more than 96%, the potential damage to global economic growth is being played out on the world's stock markets.

NASA photographs mapping industrial nitrous oxide pollution demonstrate that quarantines among China's key manufacturing centres along the eastern seaboard have resulted in a severe fall in manufacturing and port activity. Bearing in mind we're talking about the world's second biggest economy and largest exporter of goods - making up one-third of the world's manufacturing capacity - it's clear the ripples will spread around global trade, even if (as is suggested) the virus dies out as warmer weather arrives in the Spring.

There have been 'exogenous' (from outside the system) shocks to stock markets before of course; 9/11 is an example, as is Iraq's invasion of Kuwait which led to the first Gulf War in 1990. However, none have had the severity of impact that we saw in the last week of February. The S&P 500, the index of the largest companies on the US market, fell almost 13% from its 19th February all-time high, while the UK's FTSE 100 was closer to 12% lower. These falls are sharper than 9/11 or the Gulf War experience, and I believe reflect a worst-case, pandemic-driven effect on global growth.

We should of course expect markets to fall, as prices are reflecting revised global growth expectations. The Organisation for Economic Cooperation and Development (OECD) has cut its global growth forecast from 2.9% to 2.4% but suggests that a "longer lasting and intensive" outbreak could reduce that to 1.5%, as factories cut production while workers stay at home. Car sales in China are down 92%, and Apple has admitted sales have been affected by customer demand. Travel has been severely restricted, with air departures from China down by over 50%.

As is often the case when markets get a scare, Gold has hit a seven-year high. Ironically perhaps, one bright spot is Reckitt Benckiser who have seen a boost to sales of their disinfectant brand Dettol.

Government bond yields in the US have fallen to levels not seen in over 70 years, as traders (not long-term investors) looked for safe assets - the US Treasury yield is today 0.92%, the lowest in its history. This reflects the fact that many traders are buying portfolio protection at very high prices in the option markets, while selling whatever is showing a profit and has the liquidity to be sold in a hurry — which means equities and even, for the last few days of last week, gold. That enables them to hedge the most illiquid parts of their portfolio.

Typically, some retail investors who may be unadvised have panicked, with £1.5bn of global equity funds being sold off in the UK in February, most of which left at the depths of the drop in the last week of February, and thus crystallising a loss.

Time will tell whether the infection rates around the world justify investors' fears. However, Avellemy investors may be relieved to hear that the market falls' impact on the mid-range, risk level 5 portfolios in both the Model Portfolio Service and the Multi-Asset fund ranges has been significantly less than the headlines might indicate, with valuations down less than 4%. Past history tells us we can't time rebounds after market falls, and short sharp market drops do not necessarily presage longer and deeper market troughs.

These conditions simply remind us that markets are volatile in the short-term, but rewarding in the longer-term. After 43 years in the market, nothing I've seen in the last month persuades me that anything has changed...