The bottom line: all economic and financial forecasts depend more on the extent of this “fear factor” than on the course of the COVID-19 pandemic itself.
Consumption drives economies, especially in the US, but also in Europe, and consumption underpins the hope for growth in China. That is why a strictly monetary response is of limited help. All countries are creating massive fiscal stimuli directed at first containing COVID-19, but also at driving demand and consumption. Over the next few months, effective government policy will have to be directed at reducing the fear factor and providing enough economic security so that once COVID-19 is contained, people will go out, and start rebuilding and consuming again. We’re in a demand/consumption-driven slowdown, and so we believe effective fiscal responses must be geared toward consumption policies.
High equities’ correlations create opportunities for active investors. Most investments – equities, fixed income, commodities, etc – are highly correlated during panic selling (with the great exception of government securities, as investors generally move toward their perceived safety). High correlations between equities have continued as investors sell their holdings in passive vehicles, which in turn, has resulted in selling of all stocks proportionately.
We believe that investors should try to project what the economy will look like in a year instead of extrapolating today’s events. Longer term paradigm shift implications of population masses learning how to, and shifting to, working remotely or from home include: gig-economy essentials, supply-chain changes, social and event industries (restaurants, bars, movie theaters and travel), etc. During the 1918 influenza pandemic, marriages, divorces and birth rates all increased. Might we have a mini-baby boom?
It’s too late to panic sell. In our view, it’s better now to consider reallocating within equities and to potentially rebalance asset allocations in balanced portfolios. We believe the current market should provide long-term opportunity for investors who stay the course or take opportunities as they arise.
Pessimists will miss the up-market – don’t become one. As noted, we think the best approach is to stay invested in the market and use this time to assess where the opportunities are, and/or to reallocate toward better companies. We believe some of the best opportunities may be in blue-chip companies that have a long history of paying dividends. Dividend yields may decrease as dividends could be reduced, but we are not seeing a massive shrinking in dividends at this time.
Stephen H. Dover, head of equities, Franklin Templeton
