Liontrust Insights: The bull and bear cases for the stock market

By James Dowey, Chief Investment Officer at Liontrust Asset Management

When analysing the impact of the Covid-19 pandemic on the stock market, by far the most significant bear case to worry about logically follows from the widely reported and influential recent Imperial College study of the virus.

The team at Imperial believes we may need to keep applying severe social distancing measures until a vaccine becomes available because the virus is likely to bounce back whenever we lift the restrictions again. The problem is that a vaccine is perhaps 18 months away so this could cause a depression.

Right now, demand is collapsing across much of the global economy because it must. It is inhumane not to shut down the economy to suppress the virus. The immediate job for economic policy is an unusual one: rather than stimulate a recovery now, it must build a bridge to a recovery once the threat of the virus has been removed.

As such, evaluating the economy as it pertains to the stock market is a bit different this time around compared with previous recessions. The bridge needs to be built well and hopefully will not be required to span too great a distance.

As ever, it is essential to the bull case that central banks fulfil their key role of lender of last resort to financial markets under extraordinary stress. Encouragingly, they are moving through the gears extremely quickly, benefiting from the experience gained and tools built during the Global Financial Crisis (GFC) in 2008/09. They have more to do but appear up to the challenge.

Fiscal policies have rightly focused on helping businesses and households maintain critical levels of cash flow and incentivising businesses to keep employees in jobs where possible. In this way, the government can hopefully preserve the supply capacity of the economy until the demand recovery is possible.

While dramatic, as long as the recovery is not too distant, this appears doable. Say the level of GDP were to fall a huge 30% during social distancing, then fully supporting cash flows would cost the government about 2.5% of annual GDP per month.

This would obviously be an unthinkable burn rate in normal times but would coincide now with substantial QE programmes and would compare with an overall rise in G7 countries’ average government debt to GDP ratios of 33% due to the GFC.

However, it is my strongly held view that the absolutely pivotal policy measure upon which the bull case for stocks rests lies in breaking the bleak logic of the Imperial study. Put simply, the mass scaling up of production of virus tests and personal protective equipment (PPE) for everyone – the whole population – over the coming weeks can prevent a depression. This might seem banal by comparison with the development of the vaccine that will hopefully ultimately eradicate the virus or even monetary and fiscal fireworks. But the other key to a successful and timely recovery is building a basic infrastructure for an economy that can live with Covid-19 until the vaccine arrives, whilst running at a good level of activity, successfully suppressing the virus and protecting the vulnerable.

Close to daily home testing of almost everyone who hasn’t had the virus will enable the rapid identification of local outbreaks. These can then be combated efficiently by contact tracing and rapid localised social distancing measures.

Technology can help with this approach in the form of smart phone apps that enable live mapping of the virus, which is already being used in some Asian countries. Pervasive antibody testing will tell us everyone who has had the virus and who is thus now at much lower risk, at least temporarily. 

PPE for everyone will feel a bit unusual at first but will help to reduce transmission sufficiently to give people the confidence to go back to work. It will help protect the vulnerable and enable others to look after them without harming the vulnerable.

To achieve all this, the degree of scaling up required resembles past wartime efforts to reorient swathes of production facilities towards delivering supplies. This will not be possible without governments’ orchestration and commitment to purchasing the enormous quantities needed. With social distancing and macroeconomic support policies in place, it is the policy we need to see next.

If this does happen, today’s stock valuations, sitting at around the 10th to 20th percentiles across major developed markets, are attractive. If not, it is worth noting that valuations are still some significant way above the trough of 2009 and the outlook could be worse than then.     

Preventing the bear case is absolutely not beyond our capacity.


Liontrust Key risks and Disclaimers

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term. Investment in the GF High Yield Bond Fund involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Fund may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 


MeDirect Disclaimers

This information has been accurately reproduced, as received from Liontrust Fund Partners LLP. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

 

Notes from the Trading Desk – Franklin Templeton

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.


The Digest

 

Last week was more constructive for European markets (with a gain of 6% for the STOXX Europe 600), as European equities tracked gains in the United States and Asia. Whilst the US bailout package was the catalyst for the strength, it did feel like a short squeeze/pain trade drove the move higher earlier in the week. In addition, the systematic selling that we saw prior has abated.

As the week progressed, markets did feel a little more orderly and volumes were lower. Greenshoots in China also helped sentiment, as trackers of aggregate economic and virus-exposed consumer activity in China continued to improve. There is also evidence that lockdowns are working, with various news outlets reporting a reduction in the day-on-day increase in COVID-19 cases in Europe, notably Italy.

Overall, however, the picture remains fairly bleak with regards to COVID-19 newsflow and it’s unlikely normality will return in Europe for some time. Even if lockdowns are lifted in coming months, it is hard to see consumer behaviour quickly returning to previous habits, unless there are sudden advancements in testing for antibodies or vaccinations. However, any meaningful positive news on improving rates of infection/deaths would support investor sentiment.

Market Developments We’re Watching

 

Systematic selling: A question we have considered in recent weeks is how much selling pressure remains.

Quarter-end rebalancing: Europe is trading lower as at 30 March on low volumes with no new positive catalysts, but with just one more trading day left in the quarter, much has been made this week of the potential for pension-fund demand for equities into quarter-end. Given the dramatic declines in equity markets, many balanced pension portfolios are left skewed to bonds, so they will likely need to add to equities if they want to remain balanced per their mandates. Some observers suggest there will be a US$255 billion rebalance, US$190 billion of which could go into equities.

Sign of hope in Italy and the steepening Spanish curve: Whilst there had been reports from Italian regions that they had seen the number of cases slowing, on Friday there were news reports that the previous 24 hours had been the deadliest yet (with 969 deaths), which hit sentiment. Over the weekend, new cases did decline for two days running, but we must continue to monitor the situation.

Last week, we saw attention turn to Spain, where there has been a dramatic steepening of the death toll curve. It was only a couple of weeks ago that Prime Minister Pedro Sanchez was encouraging the Spanish people to join together in a mass demonstration for International Women’s Day, a calling which saw as many as 120,000 take to the streets of Madrid. Spanish deaths now approach 6,500, making it the second most-affected country by fatalities globally. On 27 March, Health Minister Salvador Illa said Spain had “not reached the peak yet” and on 29 March, we saw Spain’s deadliest day so far.Health care systems in both Italy and Spain are being stretched to near breaking point, with an alarming number of medical workers infected. Both Italy and Spain are struggling for ways to tackle the crisis, with Europe split along economic fault lines.

Central Bank and European Union (EU) Summit: A Call for Fiscal Solidarity

 

  • We expect headlines surrounding central bank measures to slow down as it does seem that they are really doing (almost) all they can currently, with the focus now on a joint fiscal stance from Europe. This was the focus of Thursday’s EU summit.
  • From an individual perspective, EU (and UK) governments have largely responded with impressive “whatever it takes” measures to contain the economic fallout at the national level.
  • The issue is that Spain and Italy in particular need centralised help, which has led to a lot of discussion about the issuance of Eurobonds (or “coronabonds” as some have been calling them) this week. The Emergency Stability Mechanism (ESM) was voted through in Germany today and will help the more troubled member states fiscally, but there is a need for a joint centralised pledge to ensure factions within Spain and Italy can’t say they were being choked out by Northern Europe during this crisis. At last week’s EU summit, Italy also apparently blocked a reference to potential support through the ESM for hard-hit member countries. Italy reportedly objects to the (light) conditionality and the stigma of a potential ESM credit line. EU Finance Ministers will meet this week to discuss the potential use of ESM.
  • No strong signal of the desired solidarity came out of last week’s summit, with any decision delayed by two weeks and no agreement to issue Eurobonds. It was the “Hansa” group of fiscally conservative northern countries who rejected jointly issued bonds. It was the same story during the credit crunch. German Chancellor Angela Merkel made it clear that Germany prefers the ESM option, whilst Dutch Prime Minister Mark Rutte said his country would not agree to coronabond issuance under any circumstances.
  • Because the European Central Bank (ECB) has already done almost all it can, the lack of centralised action should not cause serious near-term economic damage. However, there is potential for further economic risk down the line and, more importantly, severe political risk as the failure for all member states to agree to Eurobond issuance could critically weaken support for European integration. This environment is one in which the extreme right parties could be set to thrive. At this point in time, a show of solidarity, or lack thereof, could have lasting impact on the perception of what Europe stands for. Any headlines on this clash will be key this week.

Balance-sheet scrutiny: Whilst single-stock news had been getting lost within the bigger picture, focus on balance sheet is a big theme. Friday saw an example of the stress balance sheets are under as Volkswagen said that the production halt on both sides of the Atlantic currently costs EUR€2 billion a week. It is notable that we have already seen a number of UK companies coming to the market to shore up their balance sheets and raise capital. We are seeing some tangible indications of the pain smaller companies in particular are feeling already, and likely a sign of things to come.

In this context, dividends are being slashed across the board. In addition, the EU Banks Sector Index was down 6.5% on Friday after the Financial Times reported that European Banking Federation backs suspension of dividends and buybacks for banks in fiscal year 2020. We’ve also heard anecdotal evidence that some investment managers are themselves encouraging companies to cut dividends, with those holders not focused on income strategies preferring that companies preserve capital to have a better chance of survival.

No doubt, dividend payments as well as buybacks will become politicized going forward as companies benefit from bailouts, etc.

Summary of where we are in the United Kingdom: On 27 March, we heard the latest update from the UK Chancellor on capital that would be made available for self-employed UK workers. Also, whilst the United States recently reported new jobless claims, we also note there are reports of some 500,000 claimants for social benefits in the United Kingdom in the last 10 days, a remarkable increase.

UK Prime Minister Boris Johnson has confirmed he has tested positive for the coronavirus and is suffering from mild symptoms. UK Health Secretary Matt Hancock has also tested positive and Chief Medical Officer Chris Witty is showing symptoms. So, the main figureheads of the UK’s effort to combat the virus are now infected. It seems inevitable other members of the government will test positive in the coming weeks. This will be a test of the government’s efforts to navigate the coming weeks as the situation escalates in the United Kingdom.

Over the weekend, the government’s leading epidemiology advisor warned that Britain must remain in full lockdown until June if it is to avoid the worst effects of the coronavirus.

Keep an eye on crude oil: One more thing to be aware of: oil prices may come under renewed pressure this week as the OPEC+ agreement to restrict oil production and support prices comes to an end and members are allowed to produce as much oil as they want. The end of the agreement comes as relations between Saudi Arabia and Russia fracture despite the United States’ attempts to mediate, given its significant shale industry and the exposure of the US banking system to oil.


 

Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 30 March 2020, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.



MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Notes from the Trading Desk – Franklin Templeton

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.


The Digest

 

Last week was more constructive for European markets (with a gain of 6% for the STOXX Europe 600), as European equities tracked gains in the United States and Asia. Whilst the US bailout package was the catalyst for the strength, it did feel like a short squeeze/pain trade drove the move higher earlier in the week. In addition, the systematic selling that we saw prior has abated.

As the week progressed, markets did feel a little more orderly and volumes were lower. Greenshoots in China also helped sentiment, as trackers of aggregate economic and virus-exposed consumer activity in China continued to improve. There is also evidence that lockdowns are working, with various news outlets reporting a reduction in the day-on-day increase in COVID-19 cases in Europe, notably Italy.

Overall, however, the picture remains fairly bleak with regards to COVID-19 newsflow and it’s unlikely normality will return in Europe for some time. Even if lockdowns are lifted in coming months, it is hard to see consumer behaviour quickly returning to previous habits, unless there are sudden advancements in testing for antibodies or vaccinations. However, any meaningful positive news on improving rates of infection/deaths would support investor sentiment.

Market Developments We’re Watching

 

Systematic selling: A question we have considered in recent weeks is how much selling pressure remains.

Quarter-end rebalancing: Europe is trading lower as at 30 March on low volumes with no new positive catalysts, but with just one more trading day left in the quarter, much has been made this week of the potential for pension-fund demand for equities into quarter-end. Given the dramatic declines in equity markets, many balanced pension portfolios are left skewed to bonds, so they will likely need to add to equities if they want to remain balanced per their mandates. Some observers suggest there will be a US$255 billion rebalance, US$190 billion of which could go into equities.

Sign of hope in Italy and the steepening Spanish curve: Whilst there had been reports from Italian regions that they had seen the number of cases slowing, on Friday there were news reports that the previous 24 hours had been the deadliest yet (with 969 deaths), which hit sentiment. Over the weekend, new cases did decline for two days running, but we must continue to monitor the situation.

Last week, we saw attention turn to Spain, where there has been a dramatic steepening of the death toll curve. It was only a couple of weeks ago that Prime Minister Pedro Sanchez was encouraging the Spanish people to join together in a mass demonstration for International Women’s Day, a calling which saw as many as 120,000 take to the streets of Madrid. Spanish deaths now approach 6,500, making it the second most-affected country by fatalities globally. On 27 March, Health Minister Salvador Illa said Spain had “not reached the peak yet” and on 29 March, we saw Spain’s deadliest day so far.Health care systems in both Italy and Spain are being stretched to near breaking point, with an alarming number of medical workers infected. Both Italy and Spain are struggling for ways to tackle the crisis, with Europe split along economic fault lines.

Central Bank and European Union (EU) Summit: A Call for Fiscal Solidarity

 

  • We expect headlines surrounding central bank measures to slow down as it does seem that they are really doing (almost) all they can currently, with the focus now on a joint fiscal stance from Europe. This was the focus of Thursday’s EU summit.
  • From an individual perspective, EU (and UK) governments have largely responded with impressive “whatever it takes” measures to contain the economic fallout at the national level.
  • The issue is that Spain and Italy in particular need centralised help, which has led to a lot of discussion about the issuance of Eurobonds (or “coronabonds” as some have been calling them) this week. The Emergency Stability Mechanism (ESM) was voted through in Germany today and will help the more troubled member states fiscally, but there is a need for a joint centralised pledge to ensure factions within Spain and Italy can’t say they were being choked out by Northern Europe during this crisis. At last week’s EU summit, Italy also apparently blocked a reference to potential support through the ESM for hard-hit member countries. Italy reportedly objects to the (light) conditionality and the stigma of a potential ESM credit line. EU Finance Ministers will meet this week to discuss the potential use of ESM.
  • No strong signal of the desired solidarity came out of last week’s summit, with any decision delayed by two weeks and no agreement to issue Eurobonds. It was the “Hansa” group of fiscally conservative northern countries who rejected jointly issued bonds. It was the same story during the credit crunch. German Chancellor Angela Merkel made it clear that Germany prefers the ESM option, whilst Dutch Prime Minister Mark Rutte said his country would not agree to coronabond issuance under any circumstances.
  • Because the European Central Bank (ECB) has already done almost all it can, the lack of centralised action should not cause serious near-term economic damage. However, there is potential for further economic risk down the line and, more importantly, severe political risk as the failure for all member states to agree to Eurobond issuance could critically weaken support for European integration. This environment is one in which the extreme right parties could be set to thrive. At this point in time, a show of solidarity, or lack thereof, could have lasting impact on the perception of what Europe stands for. Any headlines on this clash will be key this week.

Balance-sheet scrutiny: Whilst single-stock news had been getting lost within the bigger picture, focus on balance sheet is a big theme. Friday saw an example of the stress balance sheets are under as Volkswagen said that the production halt on both sides of the Atlantic currently costs EUR€2 billion a week. It is notable that we have already seen a number of UK companies coming to the market to shore up their balance sheets and raise capital. We are seeing some tangible indications of the pain smaller companies in particular are feeling already, and likely a sign of things to come.

In this context, dividends are being slashed across the board. In addition, the EU Banks Sector Index was down 6.5% on Friday after the Financial Times reported that European Banking Federation backs suspension of dividends and buybacks for banks in fiscal year 2020. We’ve also heard anecdotal evidence that some investment managers are themselves encouraging companies to cut dividends, with those holders not focused on income strategies preferring that companies preserve capital to have a better chance of survival.

No doubt, dividend payments as well as buybacks will become politicized going forward as companies benefit from bailouts, etc.

Summary of where we are in the United Kingdom: On 27 March, we heard the latest update from the UK Chancellor on capital that would be made available for self-employed UK workers. Also, whilst the United States recently reported new jobless claims, we also note there are reports of some 500,000 claimants for social benefits in the United Kingdom in the last 10 days, a remarkable increase.

UK Prime Minister Boris Johnson has confirmed he has tested positive for the coronavirus and is suffering from mild symptoms. UK Health Secretary Matt Hancock has also tested positive and Chief Medical Officer Chris Witty is showing symptoms. So, the main figureheads of the UK’s effort to combat the virus are now infected. It seems inevitable other members of the government will test positive in the coming weeks. This will be a test of the government’s efforts to navigate the coming weeks as the situation escalates in the United Kingdom.

Over the weekend, the government’s leading epidemiology advisor warned that Britain must remain in full lockdown until June if it is to avoid the worst effects of the coronavirus.

Keep an eye on crude oil: One more thing to be aware of: oil prices may come under renewed pressure this week as the OPEC+ agreement to restrict oil production and support prices comes to an end and members are allowed to produce as much oil as they want. The end of the agreement comes as relations between Saudi Arabia and Russia fracture despite the United States’ attempts to mediate, given its significant shale industry and the exposure of the US banking system to oil.


 

Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 30 March 2020, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.



MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Liontrust Insights: The bull and bear cases for the stock market

By James Dowey, Chief Investment Officer at Liontrust Asset Management

When analysing the impact of the Covid-19 pandemic on the stock market, by far the most significant bear case to worry about logically follows from the widely reported and influential recent Imperial College study of the virus.

The team at Imperial believes we may need to keep applying severe social distancing measures until a vaccine becomes available because the virus is likely to bounce back whenever we lift the restrictions again. The problem is that a vaccine is perhaps 18 months away so this could cause a depression.

Right now, demand is collapsing across much of the global economy because it must. It is inhumane not to shut down the economy to suppress the virus. The immediate job for economic policy is an unusual one: rather than stimulate a recovery now, it must build a bridge to a recovery once the threat of the virus has been removed.

As such, evaluating the economy as it pertains to the stock market is a bit different this time around compared with previous recessions. The bridge needs to be built well and hopefully will not be required to span too great a distance.

As ever, it is essential to the bull case that central banks fulfil their key role of lender of last resort to financial markets under extraordinary stress. Encouragingly, they are moving through the gears extremely quickly, benefiting from the experience gained and tools built during the Global Financial Crisis (GFC) in 2008/09. They have more to do but appear up to the challenge.

Fiscal policies have rightly focused on helping businesses and households maintain critical levels of cash flow and incentivising businesses to keep employees in jobs where possible. In this way, the government can hopefully preserve the supply capacity of the economy until the demand recovery is possible.

While dramatic, as long as the recovery is not too distant, this appears doable. Say the level of GDP were to fall a huge 30% during social distancing, then fully supporting cash flows would cost the government about 2.5% of annual GDP per month.

This would obviously be an unthinkable burn rate in normal times but would coincide now with substantial QE programmes and would compare with an overall rise in G7 countries’ average government debt to GDP ratios of 33% due to the GFC.

However, it is my strongly held view that the absolutely pivotal policy measure upon which the bull case for stocks rests lies in breaking the bleak logic of the Imperial study. Put simply, the mass scaling up of production of virus tests and personal protective equipment (PPE) for everyone – the whole population – over the coming weeks can prevent a depression. This might seem banal by comparison with the development of the vaccine that will hopefully ultimately eradicate the virus or even monetary and fiscal fireworks. But the other key to a successful and timely recovery is building a basic infrastructure for an economy that can live with Covid-19 until the vaccine arrives, whilst running at a good level of activity, successfully suppressing the virus and protecting the vulnerable.

Close to daily home testing of almost everyone who hasn’t had the virus will enable the rapid identification of local outbreaks. These can then be combated efficiently by contact tracing and rapid localised social distancing measures.

Technology can help with this approach in the form of smart phone apps that enable live mapping of the virus, which is already being used in some Asian countries. Pervasive antibody testing will tell us everyone who has had the virus and who is thus now at much lower risk, at least temporarily. 

PPE for everyone will feel a bit unusual at first but will help to reduce transmission sufficiently to give people the confidence to go back to work. It will help protect the vulnerable and enable others to look after them without harming the vulnerable.

To achieve all this, the degree of scaling up required resembles past wartime efforts to reorient swathes of production facilities towards delivering supplies. This will not be possible without governments’ orchestration and commitment to purchasing the enormous quantities needed. With social distancing and macroeconomic support policies in place, it is the policy we need to see next.

If this does happen, today’s stock valuations, sitting at around the 10th to 20th percentiles across major developed markets, are attractive. If not, it is worth noting that valuations are still some significant way above the trough of 2009 and the outlook could be worse than then.     

Preventing the bear case is absolutely not beyond our capacity.


Liontrust Key risks and Disclaimers

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term. Investment in the GF High Yield Bond Fund involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Fund may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 


MeDirect Disclaimers

This information has been accurately reproduced, as received from Liontrust Fund Partners LLP. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

 

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.