Friday HighlightJun 12 2020

Seven big investment questions answered

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Seven big investment questions answered
ByBen Kumar

Over the past few months, advisers and their clients have been looking for reassurances and clear communication to help them understand what is happening and what impact the current environment may have. 

Clarity is vital in extraordinary times, so I’ve tried to provide clear answers to the seven most common questions we’re asked by our clients below.

How bad is the mess?

The UK government borrowed £62bn in April; before coronavirus the budget for the whole year was £55bn.

Officially, 15 per cent of the US working population is now unemployed – unofficially the figure is closer to 20 per cent.

In the UK, the furlough scheme has kept the figure under 10 per cent for now, but for almost every nation in the world, double-digit unemployment has become a threat.

So, it’s bad. Monetary policy and government support have softened the blow, but there’s no doubt that the world has taken a hit.

The global economy is likely to shrink by at least 4 per cent this year – the worst since the 1930s.

It may well have been worse without intervention, but a recession is still a recession.

Further, the cushion has come at the cost of increasing government debt rapidly.

The UK government borrowed £62bn in April; before coronavirus the budget for the whole year was £55bn.

Every nation in the world is racking up wartime-like debt levels as they try to stabilise their economies.

Of course, for investors, there’s not just the mess to consider, but also how the clean-up goes.

Why is the market ignoring the economy?

We don’t know. There is no edge when it comes to the coronavirus – nobody we know of has extra information, or a better model.

A second spike in Covid-19 would not only shrink the economy, it would also send confidence to rock-bottom.

It may be that investors have just become habituated to the “bad news is good news” cycle, by which anything negative in the economy is sorted out by the central banks pumping money.

Markets seem to be looking through the immediate economic data, which is normally a sensible approach.

Now though, there’s so much uncertainty around a second spike – and the timing of a vaccine – that it seems strange to be so bullish.

We don’t think over-optimism is warranted, hence our neutral position in equities.

We have a number of scenarios to describe the shape of the recovery, which we outlined a few weeks ago. It’s too early to be sure which one will run its course.

Aren’t markets too expensive if there’s going to be a second spike?