March 2020

Coronavirus and its Consequences

View from the Square

Coronavirus and its Consequences

We would like to wish all our clients and professional colleagues as smooth a passage as possible through this period of uncertainty. Markets hate factors they cannot fathom and, as the emerging advice indicates that this current virus will be more damaging and likely longer lasting than in its source in China, the economic consequences have clearly become greater. The greatest source of concern is the threat to human life and there has probably been no such direct threat to us as individuals, on a random basis since WW2, from an external event. 

With the global economy slowing before the outbreak and the room for further stimulus restricted by very low global interest rates, this external shock has been the catalyst for a major reappraisal of relative value. This is where we are concentrating our efforts at present. Many of our clients who have flexible mandates will have noticed us beginning our supertanker turn. Factors like Capital Gains Tax, income requirements and specialist asset classes, such as the AIM market, restrict scope to varying degrees. However, we note that periods of great volatility often herald significant change in preferences in asset selection. A good example would be the bursting of the tech bubble in 2000, as commodity assets had become much better value. 

We are now in a position where there has been so much quantitative easing that further money printing and interest rate cuts don’t seem likely to galvanise economic production. Good companies that can avoid recession offering yields of 5% look attractive compared to bonds, and may attract funds for expansion. Gold usually thrives in times of negative real interest rates. Gold shares normally outperform a rising metal price and this may well occur again when margin selling abates. 

Geographically, China and its neighbours seem to have coped well with the Coronavirus. In addition, Japan and China are light on oil resources and the fall in this commodity is a huge stimulus to their economies. Ironically, a recovering Chinese manufacturing base is now selling face masks to a once scornful US. On the other side of the commodity equation, investment in long duration mining cycles has fallen and capacity constraints suggest rising prices. These trends suggest Asian economies will prosper, and at the same time this activity will put pressure on bond prices and trigger a rise in inflation. Index linked bonds could now look much more attractive than the sometimes negative real rates on offer on many Sovereign bonds. 

Our preferences will become more certain as this crisis evolves and eventually fades. In the meantime, please rest assured that we will look to balance the need to preserve value, where we can, while seeking new areas of potential profitability. This may involve a fair deal of portfolio adjustment, which may result in less timely day to day dealing notices, but a greater attempt at helpful commentary as changes occur.  

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.


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