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Market Comment April 2020 - Corona Lockdowns and Looking Forward to May

The Coronavirus has made to the American shores with devastating speed. Next to the human cost, it lays bare the deficiencies of the healthcare systems around the world. It is quite clear that these systems are not prepared and that we have wasted precious time to gear up for the arrival of the virus. The only solution to prevent the collapse of the health systems is a full lockdown which about 60% of the world’s GDP are now under. The idea of herd immunization was quickly abandoned at this could have cost 250.000 and 1.2 million casualties in the UK and the US respectively. This is just too much to stomach for any freely elected politician who do not have enough time to isolate the people at risk. Doctors in the most affected areas must triage i.e. decide who gets life support and who receives palliative care. The economic cost which we have not even started to estimate is going to be enormous. As entire economies gradually grind to a halt, millions of staff are either working from home or made redundant right way or gradually as the crisis persists. To mitigate the pain, central banks are pumping liquidity into the markets by reducing interest rates further and buying more bonds in the financial markets to avoid an imminent credit crunch. Governments use their fiscal tools to subsidize, staff and companies to the tune of trillions of USD. The new debt that governments will need to issue to finance such largesse will be bought by the central banks. A truly virtuous cycle but there seems to be few other options. Lockdowns may be (partially) lifted at the end of April at the earliest – and lifting is necessary as people will grow dissatisfied and potentially violent staying at home idle (while on the other hand, the healthcare system is short staffed and overwhelmed and the agricultural sector lacks migrant workers who cannot cross newly closed borders with dire consequences for food supply should this situation persist for several months). What we know is that it will end. Just as the Spanish flu which appeared out of nowhere in a first massive wave in July of 1918 to disappear after a third deadly wave in February of 1919 killing in excess of 5 million people. The stock markets always trade the future and appear to be in May already. We are now seeing a gradual consolidation of the financial markets after several massive drops. Volatility is coming down and risk premiums are gradually reverting to their normal levels. The credit market for corporate and High Yield debt is suffering from massive illiquidity, but stocks look attractive. The oil sector is a pariah as the price war and reduced demand are hurting producers greatly. Oil companies will be forced to cut their generous dividends, and this will shake their share prices once more. All companies and individuals alike are hoarding cash – taking advantage of credit facilities – to support their fixed costs. This is a wise decision. For investors who have some cash in reserve, it may also be wise to test the waters with the first purchases of stocks. We currently like companies that do benefit from the lockdowns – such as e-commerce, streaming, gaming and video conferencing. Also, blue chips with strong dividend yields look very attractive but beware of that companies might slash that precious dividend to keep cash on hand. Next May, we may hopefully be back on the streets again and by then memories of the coronavirus may start to fade. You may then reap the fruits of the investments you have undertaken today. If you need any assistance or guidance on what to do in the financial markets, please drop us a line. If you would just like to speak when your lockdown is becoming unbearable, please let us know. We are always happy to chat with you.

Switzerland, April 1st, 2020

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