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A message from Paul: 6 April 2020

A message from Paul Abberley, CEO of Charles Stanley to provide a brief market update.

After a banner year for equities in 2019, what lies in store for markets over the course of the next year.

by
Paul Abberley

06.04.2020

Two weeks ago, stock markets began a tentative recovery, regaining about 10% of the previous 30% calamitous loss. This was in response to quite enormous central bank and government interventions to support the economy. But last week that more positive tone began to evaporate amid concerns that those actions might be ineffective.

While some have referred to the economy being placed in a deep freeze, a hibernation would be a more apt analogy. A bear emerges in Spring in good health, just hungry, and if food is available, is soon in great shape again. The bear’s vital functions continue in hibernation and so must the economy’s: the “supply side”. This requires the private sector to avoid administration and bankruptcy. The vast loan packages and 12-week furlough plans were designed to do just that. As ever, the devil was in the details and the strings attached rendered the packages must less attractive than headlines suggested. Moral hazard is a key challenge; how can the government support “deserving” cases without bailing out everyone at taxpayer expense, and worse, attracting opportunistic exploitation of the scheme? Solving this conundrum will be key to ensuring there is an economy to re-open when the time comes.

The “demand side” is the equivalent of the bear’s food: as we return to normality, those businesses will need customers with money in their pockets. Technically, this is a little less challenging to administer.

Taken together, the challenge of sustaining the economy’s vital functions while in hibernation and then supporting its re-emergence will also be influenced significantly by the length of the shut-down, which is itself unknown at this point. The financial markets will be apt to remain optimistic because in value terms, equities now appear good value. But they will be looking for evidence that governments can implement their schemes successfully.

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