It’s impossible to ignore the various ‘goings-on’ around the globe as a result of the spread, and subsequent populace fear and panic, from the COVID-19 virus. Wherever and whatever the root cause may be, this is temporarily forgotten as nations implement various measures in a seemingly vain attempt to contain the spread within their borders.
So what of the markets? The impact of this virus is creating unprecedented activity that bears closer examination.
Are we heading for a repeat of 1929, I asked in the headline – primarily as I read in a weekend article an allegedly leading economist quoted as saying that we were. I believe that we are far from that situation, a medium dip for sure and one that will shake a few debt trees (that in all probability needed shaking anyway) but in a few months should see a slow upturn to more steady and sensible levels.
So far, in Europe at least, we have seen several spates of national protectionism hit the headlines. Let me offer a few instances:
The Italian government bonds have come under even more pressure in the last few months, so much so that they requested assistance from the European Central Bank. The head of the ECB presented a robust response (polite terminology for refusal) which immediately sent Italian government interest rates upwards.
In the UK, on 11th March we had the head of the BofE Mark Carney announce an emergency rate cut of the basic interest rate from 0.75% to 0.25% by the Bank of England, taking borrowing costs back down to the lowest level in history.
On the same day we had the UK budget in which the new UK Chancellor of the Exchequer, Rishi Sunak, unveil the government’s Budget 2020 with a clear focus on measures to alleviate the impact of the coronavirus pandemic. Further within the sub-text of the budget detail Sunak promised to give the health service whatever it needs to cope with the virus, ‘ whether that’s millions or billions of pounds ’.
Various other emergency measures were outlined including: - the normal statutory sick pay being extended for people self-isolating and for their carers - the greater availability of small business loans to cover losses – overall business rate reforms – various cash grants. In total figures, the Chancellor has put aside an initial minimum of £30 billion with the promise of further funding as circumstances dictate.
Several major international airlines fell into what they termed survival mode, with UK airlines including of British Airways, EasyJet and Virgin Atlantic calling on Prime Minister Boris Johnson for a bailout, as the US government announced entry travel bans for citizens of 28 European countries, now including the UK and Ireland.
The USA is not alone in ‘closing’ down its international borders, as we now have Germany, Australia, New Zealand, Denmark, Czech Republic, Slovakia, Malta, Ukraine, Pakistan, Colombia and Hong Kong announcing travel restrictions and quarantine measures – others are sure to follow.
Share prices have fallen dramatically in another travel related industry, the cruise sector, as some of the major operators such as Princess and Carnival have greatly reduced or cancelled their voyage schedules for the next few months – for example on the London Stock Exchange Carnival stock price was at 3.116 a month ago, today it hit a low of reached a low of 979.60.
So what is happening in the markets today? We have the FTSE hitting its lowest level since 2011 with the Nikkei 225, CAC 40, DAX, S&P 500 and Dow Jones all following this downward trend. The International Monetary Fund has announced a 50 billion USD emergency financing facility to assist countries combat the effects of COVID-19.
Some personal observations that are worth considering now follow.
At the beginning of the year, the average P/E (price to earnings ratio - the average P/E for the S&P 500 has historically ranged from 13 to 15) was 15 – so a company making 1 million profits was valued at 15 million. Not only is it highly probable that many of these same companies are going to see profits completely wiped out over the next few months, they are also going to suffer huge losses that will, again in all probability, be carried over well into 2021.
Perhaps this is as good a time as any to re-evaluate this average P/E ratio? Should a company ever be worth more than say 8 times for a normal business cycle? Then we could see a fundamental revaluing of stock markets around the world. Above and beyond this question of the P/E ratio, it is conceivable stocks could hit zero within the very near future which would essentially make a fundamental revaluation necessary and a very different investment set up introduced. There were signs back in 2008, when the markets crashed on September 29th, that that was just the pre-shock for a big one to come, which may be now and as much to do with unsustainable debt as COVID-19, the latter just being the long overdue catalyst.
So, yes, perhaps the way the markets are currently behaving is broadly similar to that in 1929, but I don’t think we are heading for a crash of that proportion and with those consequences. They may even rally for a few days but the general trend is down. Some predict the true level of the DOW is around 10-12k and that is a huge drop from the current level of 20,918.
I think the UK is different though as I consider many UK stocks are still “Brexit undervalued” anyway - so there’s still latitude for a good return on these stocks if you time it right! I’m not so sure about there should be similar current investor interest in US (look at the recent troubles in Apple and Boeing) and the Eurozone stock prices – but then I would say that wouldn’t I?
Of one thing we can be sure is that if stocks and bonds hit the bottom then the future wealth will still end up in the same hands within a few years - so keep smiling, keep your diligence up, invest wisely and stay safe and well.