Client Update - Coronavirus - 3rd April 2020

When does the absurd start to feel normal? Capital cities around the world are deserted. Airlines are grounded. Borders are shut. Pollution and carbon emissions have plummeted. And one third of humanity - some 3 billion people - are now under lockdown.

With the first quarter having drawn to a close on Tuesday, it may be a good time to look back at some of the extraordinary things that have occurred in financial markets during this period. The unfolding human tragedy aside, there is no doubt that Q1 2020 will make it into the history books, if only because the Covid-19 pandemic is perhaps one of the only true “Black Swan” events most of us will witness in our lifetimes. Most financial crises of the past 150 years resulted from financial excesses within the system – but for once the bankers are not to blame.

The quarter finally ended with a bang as the most recent US weekly jobless claim figure of 6.6 million is not only the worst on record, it is also off the charts. To put this into context, in the worst week of the Great Financial Crisis of 2008 less than 700,000 people filed for unemployment benefits in a single week. We must understand that part of this is due to the US taking a different approach to the UK. Here, we have employer’s ability to “Furlough” staff with the government picking up 80% of the bill (up to £2,500 / month), whereas in the US they have almost tripled the benefit payments to those out of work. The UK has tried to keep staffing levels “on the books” to prepare for a rebound in demand, it will be interesting to see how this works out for America as for many, this unemployment benefit is more than they were actually earning.

On a more positive note, it took less than a month into this Bear Market for the governments and central bankers around the world to pull out their big bazookas. The US, Japan, Germany, France and Italy have already announced stimulus measures that dwarf those announced over the two years of the Great Financial Crisis.

These unfolding events have put companies under immense pressure at a time when many are still finalising their 2019 accounts. Their auditors are understandably nervous and asking for a myriad of data points before signing off that the business is legitimately a “Going Concern”. So, the priority for managements and Boards is to preserve cash, especially in the hardest hit sectors such as Airlines, Energy, Autos, Luxury, Retail, Travel & Leisure, Hotels & Restaurants.

The pattern to save cash is now familiar: it starts with cutting costs and postponing or cancelling dividends, which will emerge as one of the largest casualties of this crisis. According to a Morgan Stanley survey of European quoted companies: “94% of Retail dividends appear to be subject to suspension, while 70% of Luxury dividends and 68% of Autos dividends are exposed to either cuts or suspensions”. Meanwhile, regulators are putting pressure on the Banks to suspend dividends. In France and Germany, quoted companies will need to suspend dividends to qualify for state aid.

Amongst all this, we, as a nation, continue to do our best to help staunch the spread of new infections of Covid-19. Gestures of support and national pride in our key workers grows daily and step by step, day by day, we gradually move closer to an end to this pandemic. I gather that even toilet roils may no longer be rationed in supermarkets. Who would have thought three months ago that such a statement would make it into our client newsletter!

We are just embarking on our quarterly reporting to clients, within the limitations of trying to do everything electronically as far as possible. As always, stay safe and well, if you need anything from us, please do not hesitate to be in touch. Take care.

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