Coronavirus and the investment future
Anything which interrupts the smooth operation of the economy must be concerning to investors. Investments can’t perform well unless the businesses invested in operate profitably and businesses can’t hope to do that with lockdowns lurking as a constant threat. The material question here is, “just how much of a threat is the pandemic to the value of investments”?
Possibly one of the most interesting facts about the Covid-19 pandemic is the quite large variety of government responses there have been to it. By itself, this points to a larger amount of underlying uncertainty in the minds of top advisers than governments have so far been ready to admit.
Looking at the disease itself, the overall mortality rate is not high enough to be a threat to the whole of society. If left completely unchecked in the UK, as many as 500,000 deaths may have resulted and, although that would be judged by most people as unacceptably large, it is perfectly clear that this number is no where close to being a threat to civilisation.
And, purely from a financial point of view, the virus is known to act asymmetrically on the population in an economically useful way – older economically inactive people are at significant risk while younger pre-retirement age people are relatively free from risk. Letting the virus rip through the nation unhindered was clearly not an acceptable choice for any government in the developed world and lockdown strategies then emerged as the most favoured government response.
As far as the economy is concerned, economic life support policies were introduced to forestall the possibility of an uncontrolled economic depression developing but equity markets crashed pretty smartly without waiting to hear from governments.
Looking at the FTSE100 index as a proxy of investor experience is, though somewhat misleading. While the FTSE100 index crashed in short order by a little more than 34%, the average diversified investor experienced losses between 10% and 20%. And, while the FTSE100 index is now tracking sideways at a level a little more than 20% lower than pre-crash, average diversified investors have experienced a quite sharp recovery back to parity or better in the case of well managed portfolios.
But, in a situation where there is still no permanent end of the negative impact of Covid, should not investors be concerned about potential longer-term impacts which might not yet be properly factored in by markets? After all, such things can and do happen. An attempt at answering this question can’t be done without looking at the fundamental drivers of the situation.
Firstly, we can draw a significant amount of comfort from the strength of the recovery in the UK economy after the initial shock of the Covid lockdown as shown in the following chart.
And, although government borrowing has somewhat exploded to pay for lifeboat financial support to individuals and businesses, its not yet got to a point beyond control.
From first principles, the constraints on the extent of economic damage we experience are not limited to reducing Covid deaths. The function includes a large number of other variables, not least of which are excess deaths for non-Covid reasons and excess deaths which may arise as a function of allowing the economy to suffer too greatly.
Therefore, it appears that Covid-19 will not be allowed to trigger a long term economic depression – thereby upsetting investors greatly – because lives needlessly lost under that scenario would approach the number lost under a “do nothing” scenario.