Borrowing from Donald Rumsfeld, the former US Secretary of Defence, as the inspiration for the title of an article is a dangerous road to go down. Unfortunately, this leap into the unknown is symptomatic of the journey that the global economy is currently on as we enter August 2020.
We are faced with a combination of known knowns, known unknowns and unknown unknowns. Bear with me as I promise things will become clearer.
As mentioned in our last article at the beginning of July, the transition to economic and social normality was never going to be a straightforward exercise. The easing of lockdown conditions in the US, UK and Europe has caused an increase in infection rates. This was to be expected but is still concerning. The appetite for a return to national lockdowns looks to have gone and therefore selective localised curtailment of social contact looks like the preferred strategy at the moment. The likely spike in infection rates post-lockdown was a known known….. it was the extent of the increase that was uncertain.
We are now reviewing the economic statistics relating to 2nd Quarter of the year and it was expected that GDP figures for the world’s economies would look dreadful for the 3 months between April and June. The figures have been bad but not as bad as expected. The 32.90% annual reduction in US Gross Domestic Product (GDP) was the worst ever recorded but was not as bad as anticipated. The Corporate Q2 reporting season is well underway and to date 82% of companies that have reported have beaten expectations on the upside (Source: JP Morgan 23.07.2020) These known unknowns give some confidence that the recovery, albeit slow, is tangible and building traction.
The unknown unknown is the possibility of an effective and safe vaccine becoming available for mass use. As matters stand the only way to see a clear exit from the current position we find ourselves in is vaccine dependent. The Oxford University’s Jenner Institute in conjunction with AstraZeneca, started Phase 3 trials of their COVID-19 vaccine candidate, ChAdOx1, in Brazil on 28th June followed by other test programmes in South Africa, the UK and America. At present this appears to be the lead contender to crack the COVID-19 puzzle. The initial results are due to be published in September and the hope is that a vaccine may be available by the end of the year. The macro-economic recovery case is significantly dependent on and would be accelerated by the arrival of a vaccine, as global consumption cannot normalise fully without a return to normalised living patterns.
The last of the unknown unknowns relates to the scaling back of furlough in the UK and equivalent policy interventions in the US and other economies. This change in social policy will possibly create the environment for excess volatility in markets through August and September as the unemployment figures will probably worsen. Our advice would be to prepare for days when being invested may be an uncomfortable place to be in the very short-term. Taking the longer view, staying invested will be the most sensible approach to take to participate in positive market sentiment and the potential increase in valuation of real assets.
As has been mentioned in every previous communication to you, Scott and I are here to assist you in whatever way we can with your specific needs so please make contact with us if you have any questions about your investment holdings.
We hope you and your loved ones continue to be safe.
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