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23 March 2020

Investment Update: History Is On Our Side

In an unprecedented time for business, like everyone else, we are adapting to the changes going on around us. Beyond day-to-day working practices, we need to remind ourselves that recessions happen, and markets move in cycles. This is the foundation of what we do as investment managers; we manage diversification and risk throughout these cycles and achieve long-term positive performance. Though that is not to say you will not have seen significant movements in your own portfolio valuations of late, but we are fortunate to have history on our side. Markets and economies are resilient. They have continued to offer significant returns over the long term despite World Wars, great depressions, financial crises, which they overcome in the long run and so will we, so will many of your investments.

If anything, the market plight will create some excellent investment opportunities moving forwards, bringing long-term rewards. As the world’s most renowned investor, Warren Buffet, shrewdly said: "be fearful when others are greedy and greedy when others are fearful." Affectionately known as The Oracle of Omaha, we heed his words in times like these.

Our home turf, the UK equity market, was already well-discounted relative to wider global equity markets moving into 2020. The average price an investor is paying for a stock in the top 100 UK listed companies is a multiple of little over 14x its earnings; well below its 10-year peak of nearly 40x. The current equity sell-off, which has seen the leading index shedding c.30% year-to-date, and the more domestically focused 250 plummeting c.36% over the same period, has driven some share prices to tempting levels.
 
The Emergence & Spread of Covid-19:
In January 2020, Chinese authorities identified a new virus, temporarily calling it Novel Coronavirus. While the initial infections were mostly limited to China, the outbreak has since spread globally, with over 150 countries being hit with the virus. More than 199,000 people have been infected globally, with the number of deaths surpassing 7,900 (as at 18/03/2020). The World Health Organization has since declared the outbreak a pandemic.

Following draconian measures, including intense national isolation, the number of confirmed cases has flatlined in China, offering hope to those countries which have only recently contracted Covid-19; Chinese officials were reporting c.100 new cases per day at the start of March, compared with 2,000 per day at the height of the outbreak.

Italy has followed suit and imposed a national quarantine on the entire country; travel is heavily restricted, large gatherings have been cancelled and schools, pubs and restaurants are closed. We are likely to see the same strategies employed throughout Europe, and the wider world. The US has closed its borders to Europeans, with its President, Donald Trump, telling Americans to avoid bars and restaurants.
 
UK Response:
For the UK, the number of known cases continues to rise, and the authorities have warned that the virus could last into the coming months. Given the timeline seen in China, this would make sense.

The British government has announced social distancing tactics, while the Treasury is offering “whatever it takes” to support businesses through these challenging times. The Chancellor, Rishi Sunak, has announced state loan guarantees worth £330bn, equivalent to 15% of the UK’s GDP, alongside a further £20bn of financial handouts, to help struggling businesses cope with the impact of the Coronavirus.

The rescue package, which comes on top of the £12bn stimulus announced in last week's Budget, includes an extension to the one-year business rates holiday to cover all companies in the retail, hospitality and leisure sectors, together with government grants of up to £25,000 for those struggling in those industries. Banks and lenders will also offer a three-month mortgage break for those businesses under intense pressure.

Mr Sunak’s plan should save many lives on the British high-street, while trying to keep pubs, clubs and hotels alive. However, it remains impossible to predict an end date for Covid-19.  
 
The Market’s Reaction:
Covid-19 has ravaged capital markets, with the ongoing pandemic vehemently pushing the S&P 500 into a bear market, the FTSE 100 into its sharpest daily fall for over 30 years and European shares witnessing the largest crash on record.

At the time of writing, the FTSE 100 has lost 30% year-to-date, with the more domestically focused FTSE 100 dropping 36%. Across the channel, France’s CAC 40 and Germany’s DAX have showed similar losses, with each falling by c.35% since the turn of the year. The US has shown more resilience, with the S&P 500 off 22% year-to-date, while the Dow Jones and Nasdaq have fallen 25% and 18% respectively.

Investors have been left chasing safe-haven assets, driving the price of British, American and German government bonds higher, while draining their yields. Yet, even Gold, the traditional safe-haven asset, has failed to provide the hedge investors are looking for; the price has risen by just over 1% since the start of the year and has witnessed intense volatility.

Aviation has been one of the worst hit industries since Covid-19 struck the global economy; albeit, leisure and retail have also been badly affected. Moreover, companies are finding it near-impossible to avoid demand side issues stemming from the global slowdown, as consumers are encouraged to stay at home, which itself is reigniting supply-side concerns through a debilitated workforce. Notwithstanding these issues, that China has turned the corner, with its employees/ factories going back to work, offers companies and investors some much-needed confidence.
 
Looking Ahead:
While we are always abreast and adapting to the rolling newsflow, we now ponder the profound long-term impacts that this will have on the world we live in. Take, for a minute, last year’s trade wars and the rhetoric surrounding them. When this crisis subsides, will US President Donald Trump see much value in adding tariffs to foreign goods? It certainly won’t be in the consumers’ best interest, when cost savings will be welcomed with open arms. We would hope to see some if these issues put to bed.

A clear change we are already observing is the adaptation of business practices around the globe. During a period of exponential growth in technology, businesses have invested heavily in the technology they need to operate more efficiently. This is now being put to the test and the UK corporate world has responded well.
Our own firm has a large part of its workforce continuing their day-to-day operations from home. The transition felt straightforward, and frankly, not much has changed. We are conducting meetings through video conferencing, we continue to take telephone calls and collaborate through team management software. We hope this will spark a new wave of productivity and efficiencies when the viral clouds part, and we think this may create some exciting investment opportunities.

Redmayne Bentley has been in business since 1875 and we have lived through and learned from many global events in our history. We have weathered and survived world wars and severe market falls, and we run a conservative business which has never chased rapid growth. The capital requirements of UK regulators for firms like ours are amongst the toughest in the world and we have a strong balance sheet with no debt at all - our strong regulatory capital position (which is comfortably in excess of requirements) is funded by accumulated profits, not borrowing.  We are a regulated LLP with private owners who are fully involved in the business. Our cash balances are precisely that - cash.

Finally, as always it is important to remember the losses incurred over the past few weeks are paper losses unless realised; we maintain a steady head and a long-term perspective to seek out positive returns in due course. We remain vigilant as ever and view the current crisis as being a temporary challenge in the grand scheme of investment time horizons. We remain positive for the future and will stay resilient during the ongoing market tempest, after all we have history on our side.

Investment Update: History Is On Our Side
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