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9th April 2020

Graham BentleyGraham BentleyIn February I deliberated on the early investment impact of COVID19, and March has proved to be the month where the planet has realised there is a rather more existential threat than we might have imagined only four weeks ago. That puts an investment commentary somewhat lower down everyone's list of priorities, so forgive me if this month's missive has a rather more philosophical tone.

It has become clear that this isn't merely a Chinese issue, or at least confined to faraway countries that typically offer no threat. Now the USA is beginning to adopt a new definition of the term isolationist, as the natural barriers of the Atlantic and Pacific Oceans have not prevented the virus running riot on home territory. The daily media is replete with forecasts of the trajectory of infection and mortality rates in the UK, mostly benchmarked against China's experience. On that basis, COVID-19 related deaths are accelerating at a faster rate than elsewhere at this number of days out from the first death. However, I would be very cautious about trusting messaging about countries' respective mortality rates; such comparisons are fraught with complications, not least the availability of testing, accuracy of diagnosis and honesty of subsequent reporting. Then there's population density and the likelihood of coming into contact with infection - for example Islington has 16,000 people per square kilometre while my own region in Suffolk has around 150 people contained in the same area.

In the meantime, 'lockdown' restrictions are clearly having a severe impact on all businesses large and small, and not simply the obvious travel, pub and restaurant operations. To all intents and purposes, much of the world's business activity has screeched to a halt. In the US, the jobless figure rose by over 3 million in a single week. Plummeting demand has led to a collapse in commodity prices (other than Gold, unsurprisingly), while the cost of a barrel of oil was additionally hit by the breakdown of an agreement between Russia and other oil producers to constrain supplies. As a result, the oil price fell by 60%. One can but hope this will feed through to reduce fuel prices.

Companies' debt repayments are clearly at risk as their cash flow dries up, and this has meant that bond markets have seen yields rise as prices fell, with riskier companies' higher-yielding bonds being the hardest hit. However, Governments and their central banks have promised to throw 'whatever it takes' to keep economies from collapsing. The USA's $2 trillion and the UK's £300-odd billion packages are examples of global governments' commitment to ensure companies' cash flows are maintained.

Some market commentators have suggested these levels represent a buying opportunity, assuming markets to be cheap. Others speculate on where the bottom of this market is. This is frankly finger-in-the-air assessment, and too naive an analysis. Wherever that market bottom is, some 'zombie' companies - those kept alive through the 10-year bull market despite weak balance sheets and lower cash reserves - are not going to survive.

Finally, I recognise that many of you reading this will have had to face far more harrowing issues in recent weeks than worrying about investment performance. Following the government's lockdown instructions is a mere inconvenience for some, but a major logistical challenge and emotional upheaval for others. We can hopefully gain some solace by recognising that however long it takes to return to normality, we surely will - hopefully having learned some behavioural lessons that will make that 'new normal' a better one for us all.

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