WE talk about unprecedented times too often – the current pandemic and associated changes to our lives is not something any of us have experienced before.
The very nature of such a dramatic change to everyday life makes it even more difficult to see the way ahead for the economy and stock markets around the world.
Who would have thought that the massive falls in predicted (and actual) gross domestic product, the most widely used measure of economic growth, would barely cause a ripple in markets?
Given the scale of what we have been facing in terms of economic activity, the pace and magnitude of the bounce back has been astonishing. In the second quarter the MSCI All Country World Index rose 19 per cent - the strongest rally for 11 years.
There has been much talk of a V-shaped recovery, which implies a swift return to normality (whatever that is) and in some respects we are seeing certain aspects return to some semblance of life before lockdown.
However, it all feels a bit precarious: the re-imposition of 14 days quarantine for travellers returning from Spain with only a few hours’ notice took many people by surprise and illustrates perfectly the fragility of the recovery.
There are so many risks to take account of. A second spike is already being talked about in Europe and any further lockdowns will undoubtedly dent consumer confidence.
There is the danger of jobs failing to come back after furlough, we have seen a jump in those seeking work and the indications are not good: anecdotally numbers applying for jobs advertised have increased exponentially. This is something that will only become apparent with time.
Some companies are having to resort to significant rises in debt – backed up currently with the massive injection from central banks, but it may lead to an unsustainable level in the longer term.
The extremely fast recovery in some areas of the market are also a cause for concern – in the US there is little doubt that a number of high-profile companies are on demanding ratings which allow no room for disappointment.
On the other side of the Atlantic there is also the added risk of the presidential election in November: Joe Biden is gaining support and there are signs that he will not be as favourable for the US economy as Donald Trump has been.
The optimists are predicting a new business cycle after a short sharp recession and there are arguments to support this. The current situation has not been caused by a domestic imbalance in the economy and deleveraging pressures are likely to be moderate.
There has been a significant recovery boost from the co-ordinated fiscal and monetary stimulus from central banks and governments. However, rates of recovery vary and the UK as a service-based economy is lagging behind other countries, as is reflected in the stock market performance.
There is no magic formula for investors to deal with the current uncertainty, although the general investment principle still holds good: a well-diversified portfolio, both in geographic and asset class terms will weather most storms.
:: Cathy Dixon is a partner at the Belfast office of Cunningham Coates Stockbrokers. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.
