Bulletin

9th June 2020

Two Worlds
Article by Patrick McIntosh, [email protected]

The two worlds following the pandemic outcome, and what to do about drawing from your portfolio?

With all KMG portfolios outperforming the FTSE100 Index by a significant margin over the last six and twelve months, and with many values now showing higher positions than 12 months ago, is this the time to assume that normality has returned?

World One

Those of you following global equity markets will, like us, be seriously challenged as to why equity prices continuously rise and recover towards the values seen at the beginning of the year. Clearly this is a wonderful outcome for your portfolios, but is it sustainable?


There is much speculation that the prices are being driven higher out of utter confusion, along with a desire not to miss out on the possibility that we have misjudged how quickly the world can bounce back from global lockdown.


Just as importantly, prices may well be forced higher because of a more dramatic economic recovery than seems possible now.

The other factor that may be driving markets is fear of inflation because of the massive supply and demand shock that may occur as we come out of lockdown. In other words, will there be far too much demand and not nearly enough supply given that manufacturing and services have been unable to function for many months.


Allied with the last point, the next issue is interest rates that may well remain extraordinarily low for many years to come, and with the massive amount of money that has and will be pumped into the global economic system is this both inflationary and also very positive for economic recovery?

World Two

The headwinds that are becoming increasingly apparent from our perspective are numerous and varied, with significant unpredictability.  There is growing alarm that it is going to be extremely difficult to track and trace humanity.

The confusion about false positives and false negatives in the information that is now being generated may well create extraordinarily confused medical and government-driven guidance about what we can and cannot do.  There is increasing evidence the public are becoming ever more sceptical about political guidance and a decreasing confidence in our leadership.

Judging human behaviour and how we will all cope with social distancing, what this means for travel, workplace, employment, social connectivity and all the ways in which we used to live our lives pre-pandemic, have yet to assert themselves in the new global economy.

It is estimated that the furlough scheme in the UK will eventually cost the government (of course each and every one of us as taxpayers) somewhere in the region of £60-75 billion.  It is estimated the UK government debt may end up being over £2 trillion to cope with the pandemic crisis.

In the United States we can see writ large the issues that come from the pandemic about social divides in society and of course the knock-on effects to the Presidential election.  One significant issue that exercises us considerably is how America will come out of the unemployment that has been generated.  Will this exacerbate an already fractious environment?

One significant irony stemming from the riots in America and protests in the UK is, of course, how a new wave of virus infection through exposure to each other may be created.  If it does not, it does then beg the question as to why we went into lockdown in the first place, and why we did not follow the Swedish example.

History will report on the way in which the world managed and dealt with the evolution of the pandemic.  But it has already become clear that China, America, and Britain have a dismal record of management with extraordinary examples of being economic with the truth.  While in Germany, South Korea, Taiwan, and Sweden we see quite remarkably different outcomes and management of the pandemic.  How these issues will play out on the global stage over the coming weeks and months is very difficult to judge.

What else is going on as well?

The European central bank has in effect doubled its grants and loan packages to about €1.35 trillion in the last week.

In normal times the massive oil spill in Russia and the extraordinary damage that will now be created in the Arctic oceans is quite cataclysmic for the globe, and yet we have seen virtually nothing on this matter in any media outlet other than in the Financial Times.  This will continue to have enormous repercussions for the green agenda and the move away from an oil/carbon dependent global economy.

Money is being moved from Hong Kong to Singapore and, as the Chinese use the virus distraction and the world is looking elsewhere, action on the ground (so to speak) is extremely telling.  Of course, this poses the question that if Hong Kong is no longer safe when will there be a massive global crisis over Taiwan, as mainland China moves ever closer to demanding sovereignty of the island?  This is made all the more worrying when the management of America is in such disarray and American foreign policy is so utterly confused.

A great example of US foreign policy in disarray is the fact that five fuel tankers carrying 1.5 million barrels of fuel reached Venezuela from Iran this week without any intervention: so much for sanctions and international control of either country!

Trust in the UK government, let alone in the American and Chinese governments, has fallen to an all-time low, and as fewer and fewer people feel they are being told the truth or have any idea how they should live their lives, it becomes incredibly difficult to predict human behaviour.

A good example of trust in government is amplified by the 14-day quarantine mandate. Numerous ministers are constantly being asked to justify the science behind the instruction, but there appears to be none!  So, what is the political agenda?

Here are some ideas:-

  • The Government wants to stop us flying as a means of reducing our carbon footprint
  • The Government wants us to stay at home, so we spend our money in the UK and on staycation to help our local tourist industry
  • The Government wants us to change our habits and think about other ways of living in a post-Brexit world where moving around will not be nearly as easy as it has been
  • The Government wants to preserve the UK currency reserves.  But this is a two-way street because of course all of the foreign tourists who are not coming to the UK are not bringing in much needed foreign income and wealth to the UK

Trust is also falling over the UK crisis of track and test, the outcome of lockdown and having some of the worst death rates in the world per head of population.  There is a worrying and growing cynical observation that bringing forward unnecessary deaths was a deliberate attempt to save money!  Can that really be true?  We seriously doubt it, but in a world that has become very fractious and extremely cynical, many governments around the world are losing the confidence of their populations.

Conclusion and withdrawing capital or income

The crystal ball of future predictions remains very crowded and extremely cloudy.

We feel reasonably confident that many of these issues will start to assert themselves over the coming few months.  It seems possible that both a vaccine and a proper track and test system along with reliable analysis of infection rates could well support a rapid return to some sort of normality.

As we sit here in the middle of June and without any real experience of what will happen when the furlough scheme comes to an end, or the unemployment benefits end  in America, or the travel systems and quarantine arrangements are relaxed and improved, we recommend as follows:

If you have deferred taking income from your portfolio, then we strongly recommend that you continue with this position until September when we will review the situation again.  If you need funds urgently and/or income, then please do not hesitate to get in touch with us.  

Having built reasonable resilience into all the portfolios with high levels of cash and a move towards future technology in a new world order of economic activity, it is our strong recommendation that you remain invested, but accept the slings and arrows of outrageous fortune.  You will need to accept that the values of your portfolio and indeed the whole basis upon which we live our lives may well be changed and will challenge us all over the coming weeks and months.

We will do our best to adapt and change to the future and ensure that you are all in the best possible place to cope with the uncertainties that are undoubtedly going to play out through the summer and into the autumn.  The rebalancing arrangements that took place very recently for discretionary clients was positive for your portfolios and we will continue to develop all these ideas.