How well you preserve assets at difficult times like this is disproportionately important to your making decent long-term investment returns. My key job as a fund manager is to try to safeguard people’s savings, despite much of the data we normally rely on being questionable. It helps that I was trained by people who lived through the market shock of the 1970s and listened to their stories.
Back in 1973, President Nixon took the dollar off the gold standard, leading to it plummeting in value and triggering a global financial crisis that few foresaw.
Unfortunately for Nixon (and millions of others) oil is priced in dollars. Tricky Dicky’s action slashed the real incomes of Middle East oil producers, who responded with uncharacteristic collaboration and cut production. The oil price had risen fourfold by early 1974.
This triggered an unexpected inflationary shock for western economies. Banks collapsed in the UK, as did some well-known indebted companies. The BBC did not lighten the mood by commissioning Survivors, a series based on the world being wiped out by a pandemic. It proved very popular.
Subsequent decisions by a series of UK governments to intervene in the economy, controlling prices and incomes, arguably made matters worse. Edward Heath capped pay rises, angering miners — who were eyeing a 35 per cent wage hike. Their industrial action — or, rather, inaction — halved production, forcing coal-powered Britain into a three-day week to conserve energy. Back then, Britons stockpiled candles rather than loo rolls. Labour’s James Callaghan also tried freezing wages and property rents. The failed approach was brought to an end only after the 1979 election.
Investors are now assessing the impact of another economic shock — and this time, it is a deflationary one. Here are four themes that investors need to be thinking about:
Identify challenged sectors early
Avoiding industries that will see a longer-term impact is the first priority when aiming to preserve your savings during a period of market uncertainty. In the short term, it is evident that the leisure and travel industries have serious issues. Restaurants, for instance, will reopen gradually, but many will not have the resources to last. Even after the virus is under control, there may be a longer-lasting reduction in demand for travel.
As the government debates when to relax current lockdown measures, investors are trying to anticipate which industries will be allowed to restart and in which order.
Housebuilding may be early to restart, but it could take longer to rebuild the confidence that leads to house buying. Perhaps a year? We still do not know how deep or how long the current slowdown will be. Fifteen million additional Americans applied for unemployment benefit in the past three weeks; they are unlikely to return to work swiftly. UK chancellor Rishi Sunak has been generous, but a significant swath of the UK population is still struggling.
Be wary of debt risk
Many businesses fail when faced with an economic shock, often through the misfortune of lacking short-term funding. Central banks have pledged support, but this does not always reach its targets — and (quite rightly) governments are wary of bailouts for large corporates that do not really need help.
Manufacturers with complex supply chains could face a different challenge — waiting for every supplier to return to full production. A modern car has 30,000 parts, and you can’t miss any out.
Identify new paradigm winners
On a more positive note, we are starting to identify the sectors we will rely on in future. This includes companies that allow us to work at home — from providers of telecommunications to antivirus software, cloud computing hubs and (in my case) remote help desks for when things go wrong.
Companies such as Amazon may be seen as part of the solution in these circumstances — global sales have surged to $11,000 a second and it is scrambling to hire 175,000 employees to cope with the extra demand. Although Amazon is the largest holding in my funds, I still wish it would pay a normal tax charge.
Healthcare winners may prove more complex to identify. It seems clear that our hospitals will need greater capacity to cope with further waves of similar viruses and other pandemics. This extra capacity will be in intensive care but also, presumably, in other critical areas such as respiratory, renal and cardiovascular care.
In the UK, this requires planning and investment through the NHS. In other countries it is less clear who would pay for this. In a mixed-payment or principally privately insured system, such as the US, there seems no obvious mechanism.
Furthermore, companies are keen not to be seen to profiteer from the current crisis. US pharma company Gilead has backed down from applying for “orphan status” for its potential Covid-19 treatment, which would have made it a monopoly supplier of the drug. One hopes this will not deter others from pursuing potential cures and vaccines.
Monitor government interventions
Lastly, the state has chosen to extend its role in markets very sharply during this crisis. Telling us all to stay at home is clearly justified; paying wages to furloughed staff is generous; telling financial companies not to pay dividends is harder to justify and will reduce the support the market gives these companies in the long run.
The ambition to soften the economic impact is laudable. However, as we found in the 1970s, it often proves much harder for the state to withdraw than to pile in.
The 1970s taught us other valuable lessons, though. It may take a while, but businesses do get through these times and can prove extremely ingenious in coping. The seeds of radical positive change are often sown in the depths of crisis. In 1975, while Britain was glued to the dystopian world of Survivors, Margaret Thatcher took control of the Conservatives and Brian Clough was appointed manager of a struggling second division team called Nottingham Forest. Four years later Forest were crowned European Champions. As for Thatcher . . .
Simon Edelsten is co-manager of the Mid Wynd investment trust and Artemis Global Select fund. The views expressed are personal.
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