26 March 2020
Investors are struggling to find parallels between the sudden halt of the real economy of today and panics of the past.
Some have looked at the Spanish flu of 1918, while others have compared this period to the flash crash of 1987, the failure of hedge fund Long-Term Capital Management in the 1990s or the onset of the Great Depression in 1929. But as Howard Marks of Oaktree Capital put it last week, repeating his famous analysis from 2008: “Nobody knows.”
There are just too many trade-offs and too many decision trees to compute between the bad outcomes and the less bad. The machines lack the data and the humans lack the computing power, which makes for volatile markets.
Marshall Plan repeat
However, one of the key questions worth considering from a historical perspective is the potency of fiscal stimulus and helicopter money programmes. And for this, perhaps the closest historical parallel is the Marshall Plan with which the US resuscitated the European economy after the Second World War.
Imagine investing in 1945. Japan and Europe were devastated, Russia had lost more than 15 per cent of its population and the outlook could not have appeared bleaker. Yet from the depths of this destruction rose the German and the Japanese economic miracles and the start of American exceptionalism.
The $15 billion promised for the reconstruction of Europe under the plan was about 5 per cent of US GDP. Given the pace of recent announcements, I would not be surprised if we reach similar levels, around 2-5 per cent of GDP in terms of fiscal stimulus, before the effects of the coronavirus pandemic pass.
Increasing power of governments
Of equal importance were the social and cultural changes that developed from the war, countering the negative effects of destruction, dislocation and death. The single focus of governments was to maintain high levels of employment. As a result, the power of governments increased, as did the dependency of people upon them.
Central to the recovery in Western Europe was the synthesis between capitalism and socialism, to create a ‘compassionate capitalism.’ And we may encounter similar changes that lead to the power balance between capital and labour being swung in favour of the latter.
Governments will be incentivized to maintain high levels of employment, and much can be achieved quickly in an interconnected society. However, for this to work at a global level, some form of global coordinated leadership is required. While the US filled that role after the war, the question is whether it is able or willing do so again now, or whether that leadership comes from another part of the world, such as China.
How governments think about their provision of life support to the economy, and whether they exit or become omnipresent, is another factor to consider. To borrow from my favourite financial historian, Russell Napier, while it may be attractive for companies in trouble to accept debt from governments, it is better to accept equity as then all interests become well-aligned and we don’t compound the problems of the past.
Returns in a less bad world
For investors, posing these questions can help clarify ideas about where markets go from here. Purely fundamental investors are likely to be whipsawed by the short-term market volatility. To paraphrase Ben Graham, the market currently seems to be doing a lot of voting and not enough weighing.
But medium- to long-term, when the picture stabilises, we may find ourselves in an environment similar to that in 2009. In that recovery, the best thing to do was to sell everything that had been defensive in 2008 - good quality companies with low leverage - and buy everything cyclical that had survived.
While the near term may be uncertain, an investor thinking three to five years out might consider buying some high-quality cyclical business at distressed valuations, assuming the fiscal and monetary policy Marshall Plans come to the rescue.
To repeat what could be described as one of the core tenets of my colleague Anthony Bolton’s investment philosophy: “The most money in equity markets is made when things go from bad to less bad.”
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.
ED20 - 089