Monthly Market Outlook

When markets move in mysterious ways

March 2020 (Click here to download)

The world has been coming to terms with the implications of the Coronavirus for some weeks now, but it was only towards the
end of last month that we experienced the level of volatility we would expect in equity markets given a crisis of this scale. So
why were equities complacent in the face of a potential pandemic, why have they suddenly woken up to the threat, and what
is the longer-term outlook as a result?

The fact that equities were slow to react to the potential threat of Coronavirus could have been because investors were struggling to find value and safety in bond markets – traditionally the place to shelter from volatility in equity markets. The absence of a suitable, less risky alternative investment was forcing investors to adopt a ‘wait and see’ approach.

But underestimating the Coronavirus was always going to be a risky strategy. Given that one of the world’s largest and most important manufacturing economies (China) has practically ground to a halt, it stands to reason this will ultimately feed through to global quarterly business results. Companies less able to cope with changes in supply and demand could well fall victim to this crisis, and there are highly indebted businesses (thanks to years of cheap lending) that rely on a buoyant economy to maintain their balance sheet. We’ve not yet felt the full impact of the Coronavirus, but we will, and we need to be prepared for it. As businesses report their earnings in the coming weeks, it could make for some testing times.

The View of the Manager

A global health crisis reminds us that the economy is susceptible to forces outside of normal economic cycles and government interventions. The Manager has been constantly re-evaluating its exposures to every company, country and sector since this virus surfaced, and it will continue to do so. The Manager’s investment approach aims to protect clients’ capital as much as it aims to grow it. Its focus is on resilient businesses with strong balance sheets that are well positioned to cope with an economic downturn and/or an inflation shock.

Of course, all companies can be swept along with short-term negative sentiment, but the Manager is confident in the longer-term outlook of its portfolios and the fact it is positioned to take advantage of any volatility and opportunities as they arise.

More importantly, though, the Manager continues to hope that Coronavirus is quickly brought under control, along with the human cost of this crisis, which ultimately matters more than any short-term economic woes

“The Coronavirus clouds what is otherwise a
positive economic outlook. We expect around
six months of weak and possibly negative
economic growth in some regions. But a
recovery should follow, bringing high levels of
employment and consumer confidence.

Philip Smeaton
Chief Investment Officer
Sanlam Private Wealth

2%

The estimated mortality rate of Coronavirus.
In comparison, it was 10% for SARS and 34%
for MERS.

Source: towardsdatascience.com/9-fascinatingnovel-Coronavirus-statistics-and-datavisualizations-710cfa039dfd

Investment View: The power of infrastructure spending

In times of recession or slow economic growth, governments are known to step in with a raft of infrastructure spending to create jobs and give the economy a much-needed boost. So, when Boris Johnson announced that ‘HS2’ would proceed, he did more than agree to the completion of a high- speed rail project. This was a clear message that the newly elected UK government was ready to spend their way to a post-Brexit economic recovery.

Large government-backed infrastructure projects can often become attractive investment opportunities. While it might take several years to realise the full return on the investment, those who are patient and have the foresight to invest in the future can be rewarded with stable, and almost guaranteed, income and capital growth.

Offshore wind farms are a great example of this. Thanks to government funding in the development of new technology several years ago, the UK is now a market leader in offshore wind farms. Government subsidies are no longer needed because the scale and efficiency of wind-produced energy holds up on its own. But the initial fiscal support has meant that the UK-based manufacturers of this technology now have a global market to tap into, and the investors who backed them will reap the rewards for years to come.

Backing the right infrastructure projects in their infancy is easier said than done, so having government support is a good indicator of the impetus behind any future success. Alongside the HS2 announcement, for example, the UK government also announced its support of phase 2 of a project called Gigastack. This project aims to find a way to harness offshore wind energy and turn it into hydrogen, providing energyintensive industries and transportation with ‘clean’ renewable hydrogen. Not only will this support the UK’s 2050 net-zero greenhouse gas emission target, but it should mean that the UK companies at the forefront of this technology will help other countries achieve their targets too. For those willing to invest in the early stages of these initiatives, the longer-term potential is extremely attractive.

UK infrastructure priorities

• Nationwide full fibre broadband by 2033
• Half of the UK’s power provided by renewables by 2030
• Three quarters of plastic packaging recycled by 2030
• £43 billion of stable long-term transport funding for regional cities
• Preparing for 100% electric vehicle sales by 2030
• Ensuring resilience to extreme drought through additional supply and demand reduction
• A national standard of flood resilience for all communities by 2050

Source: National Infrastructure Commission
nic.org.uk/wp-content//uploads/CCS001_CCS0618917350-001_NICNIA_Accessible.pdf

The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by Sanlam. Any expressions of opinion are subject to change without notice.

Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Source: Sanlam Private Wealth

Sanlam Private Wealth is a trading name of Sanlam Private Investments (UK) Ltd.

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