Monday, 13 July 2020

Industry Insights: COVID-19 Conjecture

Industry Insights Series Q3 2020

Alexander Macdonald, Financial Adviser

As advisers, we expect the unknown and this has never been more evident since COVID-19 became a global issue earlier this year.

Global markets went into a sharp decline once it became obvious that the virus was not merely a Chinese problem and only massive intervention by the major central banks, which collectively pumped in around $7trillion (and still counting) on the 20th March rescued markets from the abyss, together with an improving outlook in terms of controlling the virus.

The effect on markets has been to create winners and losers of considerable magnitude, with sectors such as technology and healthcare greatly benefitting, while sectors involved in leisure, entertainment, travel, retailing have had to endure a catastrophic period of lockdown and zero income. Amazon has been the stand-out winner, being the favourite choice of online shoppers and the rocketing share price means that the company’s market capitalisation is now around $1.5 trillion! Other companies that have thrived during the crisis have been PayPal, Tesla, Netflix, Microsoft, Zoom and Apple (all American), while British companies such as Halfords, Reckitt Benckiser, Ocado, Astra Zeneca and Games Workshop have also prospered.

As advisers, knowing how the market is influenced is extremely helpful, but this poses the obvious question ‘are we heading for a fall like the technology bubble in 2000/02’?

The current economic and political climate is volatile. Countries such as America, Brazil and Mexico still have increasing cases of COVID-19 and have yet to get the virus under control; while the UK has still to conclude a trade deal with the EU following Brexit and the absence of one will be sure to have a detrimental effect on UK mid and small-cap shares.

In the USA, on top of the virus worries, President Trump has to decide on his tactics in his dealings with China and whether to apply further sanctions - which could have a knock on effect for global trade. Additionally, the presidential elections are in November and a win for Joe Biden could possibly have a negative effect on markets. The polls have him ahead at the time of writing. Lastly, the possibility of a surge in inflation, absent for many years, should also be factored in.

This all points to the need for a fully diversified portfolio of funds, with exposure to gold and bonds to cater for inflation and provide alternative, uncorrelated asset classes to equities.

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