Monthly market update from Graham Bentley April 2020, Investment Committee Chairman

Graham Bentley

TS Eliot’s poem “The Waste Land” has perhaps been quoted more often over the last 4 weeks than at any time since it was written, during his recovery from Spanish Flu in early 1919. It features the line, “April is the cruellest month…”. This was an ironic reflection on the fact that though April is nature’s month of renewal and planting, the figure of 40 million dead from war was dwarfed by up to 100 million killed by a virus. The present and near future in 1919 looked immensely bleak.

A century later, we reflect on a month where a total 250,000 people have died of SARS-Cov-2 and the world’s service and manufacturing economies have slowed to a crawl if not a complete halt. Markets remain volatile, responding excessively to daily COVID updates and vaccine rumours, as well as analysts’ slashing corporate earnings estimates for 2020, by up to 15% in Western economies.

The longer-term ramifications for commerce, and the outlook for companies’ survival let alone profits, remains unclear. Plummeting demand has led to a collapse in commodity prices with the price of Brent Crude falling by two-thirds. The downward pressure on the price is compounded by the fact that the world’s oil refineries are now at 96% capacity, even as wells continue to pump. The oil market is currently trading in what is known as ‘contango’, where a price for delivery next month is higher than today’s price. This situation normally encourages traders to take delivery of the oil and park barrels in storage, in the hopes of selling them for a profit later. With refineries at capacity, this has forced traders to charter super-tankers to act as floating storage; the cost of doing this has rocketed to over $230,000 a day. If there is nowhere to store oil due for delivery on 1^st May, the trader desperate to sell before delivery will actually pay someone to take the obligation to take delivery responsibility off their hands – hence the remarkable events of 21st April when the price of a barrel of oil collapsed to minus $32.

COVID’s impact has also been felt in the Property market. Real values of a property can only be established when it is sold, so in the meantime, funds that are directly invested in Commercial Property employ professional valuers to estimate values, based on likely demand amongst other criteria. Since these funds own shopping malls, warehouses and office buildings, given the current economic uncertainty, it has been deemed safer to temporarily suspend dealing in order to better protect investors from threat of receiving an unfair price.

Despite these ‘stranger things’ April meanwhile saw one of the strongest rebounds in stock market history. The S&P 500 index of the largest US companies, having fallen by almost 34% in 23 business days, needed to rise by over 50% in order to fully recover.  Remarkably in 28 days it gained over 30%.  UK shares joined the party but stayed in the kitchen rather than dancing in the living room, rising a little under 20% from their March lows. Bond markets improved too – a consequence of unprecedented piles of money being created by the world’s central banks to prop up asset prices, and distribute to the public as tens of millions of individuals are added, however temporarily, to unemployment statistics.

With one or two notable exceptions, eg. Russia, much of the developed world appears to have passed the peak of daily new cases of infection. Numbers of Google searches for ‘coronavirus symptoms’ have plummeted as many market participants worry less about the disease itself and now speculate about the impact a self-imposed recession is likely to have on companies (and society as a whole) over the coming months.

Expectations for negative impact on a country’s GDP by the end of 2020 depend on how smoothly it emerges from lockdown, eg avoiding a second wave of infections. The UK Governments own figures are not optimistic; the UK’s Office for Budget Responsibility has estimated that the closure of schools, shops, offices and factories was costing Britain £2 billion a day. They are predicting a 12% fall in GDP by year end, ie £250bn lost.

It is here that I sound a note of caution.

Take economists’ and others’ forecasts with rather more than a shovel-full of salt.

Economists like to use models of the world to predict likely outcomes – and if we ask economists for decimal-point precision they’ll provide it – but models are always wrong. They may be useful at explaining the past or pointing out potential unintended consequences of otherwise well-meaning financial initiatives, but no economic forecast can perform the feats its users have come to expect of it.

No one can forecast the future, but economists are especially useless at it. As the months pass, actual numbers will be revealed as companies publish their accounts, particularly at the half-year point where the full impact will have become clear. That may not be pretty, but as the rebound in April demonstrates, time in the market is more advantageous than timing the market.

Patience will remain a virtue however events unfold.

Stay safe.