Bulletin

15th April 2020

Post-Easter bulletin update

We are pleased to share with you an extremely relevant article from independent economist Julian Jessop. Many of you will have seen him presenting at our seminars in recent years, but he is also a valuable member of our Investment Committee and his work and insights help guide our thoughts to create your investment strategy for the years ahead.

While we leave you to consider the thought-provoking bulletin from Julian below, please bear in mind that the discussions referred to are happening largely behind closed doors as the Government faces the huge dilemma of how best to bring the current social restrictions to a close. And this is the most important factor for economic recovery.

Statistics are incredibly flawed within a crisis that is so fast-moving, whether guesstimates of Gross Domestic Product (traditional measures of GDP, unable to pick up swathes of modern economic activity, were already horribly out of date), or, more topically, rates of infection and even death. We suspect that there will be time for deliberation on these statistics in the years to come, and recrimination perhaps.

For now, with so much that is unknown and with so many plausible theories, almost all of which will be utterly wrong, we are not making any further investment changes at this stage. We have worked to ensure you have sufficient access to cash for an extended period of time, and yet you are positioned in a way that you can recover and ultimately benefit as and when we see a stronger recovery.

The KMG Team

Performance

As we move through the crisis, we thought it worthwhile to show how the investment strategies are developing. Bear in mind these are indicative only, as your own portfolios will be affected by various considerations that are likely to be individual to your personal circumstances:

One year performance of KMG strategies with indices

One quarter performance of KMG strategies with indices

What can economic history teach us about the lockdown?

The coronavirus pandemic is, of course, first and foremost a social crisis. It is testing the limits of the NHS, bringing out the best in our doctors, nurses and carers, and many others on whom we all rely. But it is also a huge challenge for policymakers who are trying to protect businesses, jobs and incomes, so that the economy can quickly reboot once the lockdown is lifted. And while the saving of lives is rightly the priority, the extent and duration of the economic disruption could also have significant impact on our health.

Fortunately, history does provide a few pointers. Perhaps the least surprising conclusion is that vicious diseases cannot be allowed to run unchecked. One particularly grim study of the longer term economic consequences of 15 pandemics, all the way back to the Black Death in the 14th century, found that the fall-out persisted for as long as 40 years.

More positively, recent history shows that brief falls in economic activity, even large ones, do not necessarily lead to a deterioration in health outcomes. US research suggests that a temporary economic downturn is more often associated with a small improvement in overall mortality rates, due to indirect benefits such as fewer traffic accidents.

Together, these studies suggest that it might be worth taking a large hit to the economy in the short term in order to get on top of coronavirus. That conclusion is supported by a recent analysis (by economists Correia, Luck, and Verner) of how different US cities responded to the ‘Spanish Flu’ pandemic of 1918. As you might expect, the cities that suffered the most deaths also saw a sharp and persistent fall in economic activity.

But just as importantly, this study also looked at the impact of the sort of restrictions that the UK government is imposing today, such as banning public gatherings, closing schools and churches, and shutting shops and restaurants. The researchers found that those US cities where the authorities intervened earlier and more aggressively did better in terms of mortality rates, without doing any worse in terms of the impact on economic activity. If anything, their economies grew faster than others when the pandemic was over.

Obviously, none of these studies are exact matches for the current crisis. Economies may now be more vulnerable to some types of shock, for example, because of fragile ‘just-in-time’ supply chains and less secure forms of employment. We are also now more aware of some potential costs of social isolation, such as mental health problems, increases in domestic violence, and greater food insecurity (unfortunately, there is already some evidence of all of these).

Covid-19 itself does not appear to be as severe as the Spanish Flu and is certainly less harmful than the Black Death, or the Great Plagues of the 16th and 17th centuries. The mortality rates are also much lower than some more recent coronavirus outbreaks, notably Middle East Respiratory Syndrome (MERS, 2012) or Severe Acute Respiratory Syndrome (SARS, 2002).

Nonetheless, the evidence in front of us is also refuting some of the more complacent assumptions made by armchair pundits – such as that Covid-19 might not be much worse than ‘seasonal flu’, or that it would ‘only’ be a serious risk for the elderly or those with existing health problems (not that these distinctions should really matter anyway). The prospect of the NHS being overwhelmed with coronavirus patients is something that should worry us all. On the other hand, there are growing concerns that the lockdown itself is discouraging people from seeking care for other conditions, which could potentially cost lives too.

There are therefore no easy answers. Experts, whether in healthcare or economics, have to make a balanced assessment of all the risks and uncertainties, and there are many. But history at least suggests that the current lockdown should help both to save lives and to reduce the long-term economic costs of the coronavirus pandemic as well.

Written by Julian Jessop, Independent Economist