LONG-TERM OPPORTUNITIES COULD FOLLOW IN 2021

Glimmer of light

  • 27 March 2020
  • 10 mins reading time
  • We expect the turbulence in asset prices to continue for some weeks

  • Analysis suggests an economic recovery in 2021 with opportunities for long-term investors

A pattern is beginning to emerge in the spread of and reaction to Covid-19. Some countries have responded more effectively than others and the lesson is fairly clear. While we hope for a continuation of robust government responses, we recognise the financial support being extended, and anticipate a longer-term outcome that can present investors with opportunities.

Robust is a must

As we know, the spread of Covid-19 began in China where the initial response was, at best, under-stated.

As the number of cases increased and the rate of contagion also rose, reality hit home and the Chinese government imposed a strict lock-down in the Hubei province where the majority of cases had been recorded.

This sort of militaristic approach was robust, necessary and successful, slowing the contagion rate significantly. However, it led to a sudden halt in daily life for governments, businesses and individuals.

In order to alleviate the implications of this halt, financial authorities stepped in to offer loans, low interest rates and other supportive measures.

The conclusion appears to be clear: the earlier that strict lock-down conditions are applied, the lower the contagion rate, number of deaths and financial fall-out.

China might have been slow to act, but when it did, it did so decisively. The result was a reduction in contagion rates with the total number of new cases having more or less flattened out at just over 81,000 at the time of writing.

Unfortunately, not every country has taken this lesson to heart.

One could argue the UK is among those that might have acted more swiftly and more decisively, unpopular though such measures may be.

The lock-down is in place now, and the financial support being pledged by both the Bank of England and the government are to be applauded. If these actions can be implemented effectively, then businesses and households have a much better chance of weathering the financial stresses that the coming weeks will bring.

The elephant in the room

Perhaps the biggest question now hangs over the biggest economy in the world; that of the US. Is it taking sufficient measures to combat the spread of Covid-19?

Lock-down measures have been imposed on a state-by-state basis, but fewer than half of the states have imposed this, leaving around only one third of American citizens under lock-down . There is a 15-day social distancing recommendation in place nationally, but this is only a recommendation and President Trump has indicated that he would like it to be relaxed as soon as possible.

Meanwhile, the president has proposed categorising different parts of the country according to the levels of risk carried there. While we hope that this works, it seems more akin to the unsuccessful Italian policy than the unpleasant but effective Chinese one.

Conclusion: short-term pain, long-term gain

Nothing is more important than health. So we support all the measures and efforts to protect human health.

Our responsibility lies with investments that our clients have entrusted to us. With this in mind, we recognise the potential for further falls in asset prices over coming weeks as more data come in revealing contagion rates and financial fall-out.

But, we are long-term investors and, as such, remain focused on the long-term prospects of around 10 years or more.

We’re beginning to see evidence that long-term investment prospects could be positive.

People will still need products and services once the crisis subsides. As a result, companies that provide them will continue to exist, and many of those companies’ share prices have fallen to more attractive levels.

As we’ve mentioned in other briefings, the economic outlook that Schroders, our investment partners envisage indicates a sharp recovery in 2021. That outlook also presents a range of assets that, if selected carefully with the appropriate levels of research, could deliver attractive returns (though returns are never guaranteed of course).

In short, the near-term outlook remains very difficult, but there are glimmers of light on the horizon.

Important information

Any views expressed are our in-house views as at the time of publishing.

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In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

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