The UK government, mirrored around the world, has already underwritten a huge swathe of industry.  Indeed, it is as close to socialism, even communism, as we ever expect to see – and from a Conservative Government with a history of 10 years of fiscal rules and austerity.

80% of employees’ wages are to be met by the Government where required, taxes deferred or cancelled and guaranteed loans made to some companies to maintain cashflow through this period of lockdown.

The future, as ever, is fluid and changing and difficult to predict but as we sit here today, this is what the team at KMG believe we should expect more of:

The Government, like others around the world, will work with central banks. They will print huge amounts of new money, thereby creating huge amounts of public sector debt, and will use this money to preserve the economic fabric and prevent anarchy.  Perhaps they will ring-fence this debt, cancel it or inflate it away, but one way or another they will keep it separate to limit the future impact on the economy.

The new cash will be used to pay salaries, to offset mortgages, as grants to business and to otherwise ensure few companies and no banks go bust. Therefore, employment is managed and the housing market prevented from meltdown. 

The financial markets will only recover when it becomes clear that we have enough food, energy and healthcare for everyone. Through government action, and by people doing as instructed to protect themselves and others, society will slowly recover. The real economy will take much longer, perhaps 18 months or so, and will never be quite the same again.

Over the summer, medicines will be introduced to help cope with the effect of the virus which will allow society to begin to move forward again in a meaningful way.  Longer term, a vaccine will be found, finally ending the threat of this virus.  COVID-19 will provide a wake-up call to society about the dangers we live with, the money we must spend on healthcare and research, and prompt a whole range of changes to the way in which we live.

We are forced to learn about digital communication and ways of working outside the traditions of the 20^th century.  We will be working out what is most important for the future in terms of energy, social activity, entertainment and our health.  We will discover the benefits and some pitfalls of technology along the way.  What might have happened over 10 – 15 years is happening in just 10 – 15 months! 

We have historical examples of the Government acting in similar ways: raising debt to meet crises, albeit rarely and in times of dire need.  We saw William Pitt raise debt-to-GDP to over 200% after the Napoleonic wars, and over 250% once again after WWII.  Yet we saw periods of huge prosperity subsequently.

This all feels deeply uncomfortable and yet society will evolve as it always has.  Financial markets will recover, as they always have.  There will be lessons learned, and some forgotten.  But we must hope this is a once in a lifetime event and we will eventually see an improved, healthier and more sustainable society in the years to come.

Our view of the background

Britain has fallen in-line with other European nations, and with Australia, New Zealand and the US. Non-essential movement is restricted.  This comes as no surprise, given the pictures we have all seen as British people continued to congregate in public spaces.

The spread of the virus has shown no sign of abating in the UK or across Europe, albeit there are currently rumours that in parts of Italy the rate of spread is starting to come down. We can only hope that this is the case, and we should take lessons from their experiences.  In the meantime, there is a palpable sense of anxiety running through society.

It is amid this anxiety that we have seen the value of all the portfolios we manage fall by more than 10%, the level at which the rules ensure that we notify you.  However, do remember that for all of the financial turmoil and the FTSE 100 collapsing by almost 40% since its peak, KMG portfolios have declined by a considerably smaller margin of between 15% to 22% compared to falls in the index.

A brief ray of relief saw almost all of the portfolios show some recovery last week, after a number of difficult days in the first half of March.  However, we are bound to see more false dawns before we are through the worst of this crisis.

The performance of financial markets will depend on how governments and banks support the economy, which becomes even more necessary following Monday’s announced closure of non-essential workspaces.  Ultimately markets rely on confidence more than anything and so we will continue to see remarkable promises and guarantees from governments and banks which will dwarf anything seen thus far in our lifetimes.

Communications from KMG

KMG will issue communications at least once a week for the time being to keep you updated on our thoughts and actions, as well as individual communications relating directly to your portfolio. Unfortunately the postal system may be severely restricted in the future, so we cannot be sure what will get through and when.  Therefore, we will be communicating with you securely and quickly via email or your client portal wherever possible.

If you are not comfortable using on-line communication methods, then perhaps you have a family member or friend who would help you or who could receive them on your behalf and pass them on? Please let us know if so.

Client seminars

We have made a decision that this year’s seminars will not go ahead in light of the turmoil around Coronavirus.  We had asked you to save the date of 15^th or 16^th October, which you can now remove from your diaries, however, we will look forward to welcoming you next year.

The KMG Team