Latest thoughts

Hunker down and carry on

As uncertainty and market performance has gone from bad to worse, the KMG team would like to take this opportunity to answer some of the questions asked of late. What does the budget and bank rates cut really mean when markets are collapsing? Is the correction in markets long overdue?

Our points to note

  • Interest rates remain extremely low and banks have been allowed relaxation in lending. This will maintain liquidity in the economy and provide a springboard for recovery.
  • Massive fiscal stimulus here and in most of the world will eventually feed through as infrastructure spending kicks off and picks up.
  • The price of cheap energy is a huge support to the global economy.
  • The virus will come under control relatively quickly, in comparison, whereas fiscal stimulus and cheap debt are here to stay for a decade or two while we digest the demographic age wave.
  • Debt cannot get much cheaper, but large unsustainable debt and falling birth rates could lead to lack of confidence in currencies. Increased use of alternative payment systems may allow us to leave debt behind. This is why we remain sceptical about investing too much in bonds, debt and cash.
  • Equity investment in all its forms is always the only way to protect you against inflation; it is in the end the only thing that keeps pace with inflation.
  • Dividend yields will remain higher than interest rates and thus whatever the price of your investment, the income flow will continue. If this income is reinvested in cheaper shares, so too the recovery when it comes creates even quicker gains and wealth; this is a basic fact of life.


Patrick started advising some of you back in 1975. If you look back that far the stock market was about to disappear into a black hole. Britain was bust and had to be bailed out by the IMF.

To put the current situation into some context, we had three-day weeks, 18% interest rates, 25% inflation, rubbish in the streets and bodies decaying in the open because they could not be buried. However, if you held your nerve4 and remained invested, by 1979 markets had bounced back.

Many of you have traded with us through hurricanes, market collapses in 1987 and 1989, many oil shocks and wars, the appalling events of 9/11, more wars and the economic meltdown in 2008/9. We must remember that markets are a barometer of fear and the worst-case scenario because they are driven by human behaviour.

100 years ago, in 1918/19, the Spanish flu pandemic went global even without rapid transport. We expect this one will be the same and the death rate to be no higher than about 2%; it seems likely that we may all get the virus in the same way we all have had flu at some time in our lives, but many people will experience very few symptoms. We keep being asked, is this good or bad for the economy? Take Japan: over the next 20 years their population is set to decline from over 135 million to about 85 million, a change which was already in full swing long before the virus hit. The cost of coping with an aged population has increased their national debt to over 250% of GDP. For reference, Europe’s debt is still around 100% of GDP.

It is easy for government to fund the debt because it is so cheap to borrow. Debt has not stopped the Japanese economy, nor the stock market, nor the corporations in Japan from performing. Just look at how well they coped with the rugby World Cup and, we hope, the upcoming Olympics.

What will happen when the rest of the world starts taking on as much debt as Japan?  The key to debt is retaining confidence in our currencies and persuading everyone to invest in debt even when yields are so low. The issue, as demonstrated in the German currency collapse in the 1930’s is that confidence in government and currencies can evaporate very quickly.

The pandemic will roll through the world. There will be false dawns and re-infections, but the more time goes by the closer we get to a vaccine, and the more people get infected and recover the stronger we all become. The virus issue is of limited time scale, more limited than the debt crisis of 2008, so when signs of control become evident, markets will bounce back, and investment portfolios will recover. They always have, they always will, this time is no different.

Structural change

The world has been waiting for this event. There have been suggestions for many years that the greatest threat to civilisation is a pandemic.  Central bank relaxation of capital controls and lower interest rates are a help.

The slump in the oil price is a significant threat to some producers, particularly US shale firms, but should still be a major stimulus for the global economy as a whole. The problem here is that much of the USA oil and gas industry is financed on debt and this is why the credit markets are also in panic because the federal reserve may be forced to create a massive bailout for the industry.  If they don’t, then many banks could fail.

Fiscal stimulus on steroids is what we have just seen in the UK budget. This is long overdue and was also the central plank of the Labour Party election campaign. To retain fiscal prudence in the UK past this budget, responsible measures must be taken.  The Japanese experience will be the model followed in the EU and USA along with the rest of the world. The biggest challenge for Europe, however, relates to Germany: will they allow more debt?

Future investment themes

Part of the oil price collapse is about decarbonisation.  Budgets across the world are becoming “greener” and support for alternative energy supplies will just grow and grow.

 We welcome low oil prices for two reasons:

  1. Because this makes it even cheaper for industry to build alternative green energy ways of doing things, and
  2. Because oil companies will become less and less profitable leading to deeper and lower exploration and speeding up their diversification into alternative energy supplies.

Technology in all its forms will be a huge winner from these times.  For example, Ocado is booming as it has the smartest of all supply and delivery chains in the groceries marketplace.  Online shopping, online banking, trading, media streaming, video calling, and developing cures as all the genome data is shared across the world. The list is long and opportunities incredible.

The virus will lead to massive investment in better food production as we as humans learn to respect that food is not a cheap thing we can abuse. The virus came out of wet meat markets in a major conurbation; the way food is produced and distributed will change beyond our wildest expectations and in turn the change in lifestyles will create a whole host of new investment opportunities.  One of our great funds is the Smith and Williamson Artificial Intelligence fund which ticks all these boxes.

Transport is changing already for health, wellbeing and climate reasons and the virus will stimulate alternative patterns be it public or private, hydrogen or electric. Infrastructure in all its forms from schools, to transport, to health care, to housing and all the ancillary knock-on benefits of these big employment projects will feed into global economic expansion.

How do all the above themes hang together? Through fiscal stimulus. Ask yourself why Japan has not fallen apart and then think about their high-speed trains, super connectivity, long life expectancies, great education and amazing infrastructure.

What would you logically prefer?

  • To have your wealth in one or two bank accounts with low yields, subject to default, lockup and inflation, or
  • To have your wealth spread thinly into assets across the world in a variety of countries, companies, currencies, and industries especially following the themes we espouse.

We have had remote working contingency plans in place for many years and will be able to respond from home or work as required.  If you want or need to react to this note, please contact the office on 01342 840100 or email [email protected]  Gemma will filter requests to the team or your adviser according to your requirements.