Please find below our “Weekly Market Update” as at 6th March 2020
Blue Sky Comment
The Cavalry to the rescue?
The cavalry have come to save the day! Or at least that is how it looks at the moment for the global economy. Sadly, no such rescue for Flybe!
Last Friday, at the end of a dramatic few days across the markets, we stated that we expected significant stimulus from Central banks and governments and this is exactly what we got. In fact we got a little more than was expected and this spooked the markets at first. The Federal Reserve decided to aggressively cut interest rates by 0.5% and this led to the major indices in the US falling, as analysts tried to digest why the Fed had taken such dynamic action. Remember, the investment markets don’t like surprises!
Was this good news or bad news? ‘What do the Fed know that we don’t know’ was the thinking?
Importantly though, the action from the Fed was not taken in isolation. It is difficult to stretch the point to say it was co-ordinated alongside other countries, but it coincided with the commitment of leaders around the world, who are pledging action to shield their countries from the economic impact of the outbreak. China, Japan and latterly the World Bank have announced stimulus packages. The World Bank has committed $12bn (£9.4bn) in aid for developing countries grappling with the spread of the coronavirus. The emergency package includes low-cost loans, grants and technical assistance.
All this support helped sentiment and equity prices responded favourably, but as we close the week, these very same markets are falling, as the economic picture unfolds. It looks like we have got to navigate some choppy waters but it is worth remembering that a good proportion of our portfolios are exposed to bonds which are actually rising in value, thus tempering the downside impact of equities.
The news has been dominated over the last couple of days by Flybe’s demise and whilst it is sad to see it go into administration, particularly in the context of regional economies, their business model was broken. This was just the final nail.
In fact what has happened to Flybe will happen to other companies with poor business models. We see this unfolding on our high streets every month. A bit like the Coronavirus, the impact will be felt most by the weak and the vulnerable! The key then, is to invest in healthy companies with good business models which is why we value our partnership with the likes of LGT Vestra, so highly. Their research capability should not be underestimated and it is at times like we are experiencing now, when we see the real value of their approach.
Globally, let’s hope the cavalry allows us to win this particular battle soon. The fallout from the spread of the virus will depend upon how long it goes on for but we should be reassured that the relevant authorities are ready for further action, if required. Fiscal stimulus being the most likely.
This leads us on nicely to next Friday’s update, the day after the budget. We’ll be updating you with the ramifications of this eagerly anticipated 1st budget, following our final decision to leave the EU. Fiscal stimulus appears to be very much on the cards as is increased spending on infrastructure. It’ll be a nice change to talk about something else other than the Coronavirus!
Just before you go….
You might be interested to hear that Gary got accosted by BBC 5 live yesterday as he attended the British Chambers of Commerce Conference in London, with fellow Director, Tammy Dimond. They were representing the Dorset Chamber of Commerce. Gary was asked impromptu questions about the Coronavirus and then Flybe. The interview apparently went out yesterday afternoon.
Have a great weekend
The Blue Sky Investment Team