At the turn of the year, we were focused on the major political and economic events that we thought would shape the weather for investors in 2020: the next stage of the UK’s exit from the European Union; the upcoming US presidential election in November; and the planned stepping down of Angela Merkel as Chancellor of Germany after 15 years as the pre-eminent politician in Europe, to name but a few.

As we have always said, a few weeks can change the perspective of the central events to consider when managing clients’ portfolios. This dictum has never proved more true than in the current extraordinary circumstances and the continuing battle against coronavirus.

Where are we today?

The backdrop as we entered 2020 was of all risk assets, be they equities, bond markets or property at elevated valuations that were overdue a retracement. After 10 years of a bull market, investors had become increasingly complacent with valuations stretched in large part because of an unprecedented level of support from central banks in the form of quantitative easing and record low interest rates.

While the extent of the crisis that coronavirus has wrought, both from a health perspective but also economically, wasn’t anticipated. Western economies and equity markets were in a poor position to weather any economic shock.

Record low interest rates across Japan, Europe, the UK and US have left central bankers with nowhere to go with regard to monetary policy. There has been no normalisation of interest rates in the UK at all, with base rates remaining at 1% or below for the last 11 years. Conventional theory would suggest a cut in the region of 4% to interest rates would be required to stimulate the economy after such an economic shock. Evidently, without pondering the realm of negative interest rates, not something that is possible with base rates at 0.75%, as they were in January and February this year.

What is the likely policy response?

We would expect a global wave of quantitative easing (or money printing to give it its more common name) to an extent never seen before together with a widescale fiscal response from governments across the world. These policies will likely have to last for years.

It is conceivable that central banks across the world will be required to step in and part fund major Western economies for the next decade. The previous global experience of quantitative easing from 2009 onwards (where the UK printed £375 Billion and the US $3 Trillion), ended up supporting the balance sheets of large investment banks and inflating the value of assets from government bonds to equities, but crucially did not really filter down to the average man or woman on the street.

The challenge in 2020 and onwards is for politicians and central bankers to direct this support to the ordinary economy. A task that is easier said than done.

The beginnings of the response have already been seen. Policy makers globally have acted in a fast and coordinated way to show markets they really will do ‘whatever it takes’ and have backed this up with tangible action (Bank of England £200 billion QE programme, European Central Bank 750 billion Euro programme and the US Federal Reserve effectively announcing unlimited QE). This has driven risk assets to rebound about halfway from their late-March lows.

Despite all the uncertainty, there is a great deal to be optimistic about. Tilney has been investing money for clients since 1836. In the last 180 years, the world has encountered many challenges. In the 20th Century alone, the world was faced with two world wars and a Great Depression but still benefited from the greatest creation of wealth in history. Human drive, ingenuity and the advances in technology find a way.

In the fullness of time, when we defeat COVID-19, the world will present us with very different investing conditions. Investors will have to be nimble but also have a firm grasp on the long-term trends that will drive returns and create wealth for clients. As one of the largest and best resourced investment management businesses in the UK, we believe we are well positioned to get those decisions right.

To summarise, key considerations are:

  • Lower global growth due to structural challenges – higher levels of debt and challenging demographics in the Western world
  • The conflict between inflation and deflation
  • Lack of appeal of traditional safe havens – cash and conventional bonds
  • Active management – an essential component of our approach