Mazars Economic Update - April 2020

George Lagarias, our Chief Economist & David Baker, our Chief Investment Officer share their views on the impact of the Covid-19 pandemic on the Markets & Economy.

Coronavirus: Crisis or Shock?

The world has changed dramatically since the end of February, in the very literal meaning of the phrase. Given that the virus appears not to have a very high mortality rate (2%-3%) western liberal democracies weighed the loss of life, threatening predominantly cohorts of 60+, against the economic cost of a lockdown, and decided that protecting as many citizens as possible would become a priority. Economists exited emergency government meetings, and epidemiologists took over as the “experts of our time”. What followed was unprecedented. Closure of all non-essential shops and schools and any kind of economic activity, save for supermarkets and establishments related to food provisioning as well as healthcare. Lockdowns and curfews, some of which were not even seen in war time. Restrictions and eventual shut down of travelling, not only internationally but also domestically. Most forms of commerce have stopped. Usually busy commercial streets and roads suffering from heavy traffic are now empty. Office workers and even TV presenters are now telecommuting. At the same time, people are inundated daily by pictures of Italy and Spain, containing scores of caskets and funerals with no attendees. Already strained healthcare systems find it difficult to respond to the rising numbers of infections that need treatment, while treatment for other emergencies is suffering.

The Markets

All this is happening under further pressure from crumbling stock markets, which have now seen a fall of as much as 25%-30% from their highs. Daily movements of stock markets have broken records; since the end of February the S&P 500 has experienced the two worst days since 1987’s Black Monday, as well as the best day since 1933, as algorithmic trading exacerbates volatility.  Small-cap stocks have been especially pressured, as well as high yields bonds, categories of companies which investors think might suffer from cash shortages. Credit spreads have widened sharply for both investment grade and high yield corporate bonds. Even the sovereign bond market has been affected, with yields initially crumbling (as one would expect during a crisis), but then swiftly rising, as investors sold indiscriminately and at any price to meet their obligations. Economic data suggests capitulation, especially in the services sector, which comprises of 60%-80% of western economies, and a massive rise in unemployment, especially in the US. Preliminary Purchase Manager Indices, a reliable economic activity leading indicator, suggest a record fall in economic activity in the Eurozone. The European service sector in particular has fallen further than the February 2009 trough.

Economic response uppercase

Governments and central banks have unleashed a slew of economic and financial stimulus measures to counter the economic demand shock. From fresh QE and slashing interest rates to zero, to job retention schemes, tax and rent deferments, credit lines and other measures to prevent businesses with cash flow problems crumble. The BoE cut interest rates to 0.1% and restarted its QE programme while the UK government has unveiled a plan to guarantee £330bn worth of loans for businesses as well as £20bn direct money for businesses and households. The White House unveiled a nearly $2tn plan to combat the economic effects of the virus, including cutting citizens cheques (helicopter money), while the US Treasury proposed to guarantee money market funds to prevent secondary order market events. Single individuals will receive a $1,200 tax rebate and married couples a $2,400 rebate. The Fed followed, with comments about lifting some barriers for bank loans (small businesses will need these now), buying commercial paper and some state and corporate bonds, and making accounting changes. Spain announced a €200bn package and Germany a €150bn package, all topped with significant credit lines. The ECB added €750bn (sovereign and corporate) QE to maintain market liquidity throughout this crisis.


There has been a huge monetary and fiscal response to the crisis. Though monetary policy response has varied, it has essentially come down to slashing interest rates, furthering QE and seeking to ensure liquidity in financial and loan markets

Below we chronicle fiscal responses around the world:


Fiscal Response


An estimated RMB 1.3tn (or 1.2% of GDP), mostly focused on epidemic-related healthcare, tax relief, wages and insurance.


Agreement has been reached on a $2tn package (around 10% GDP). The Coronavirus Aid, Relief, and Economic Security Act provides for transfers to households (a $1200 cheque for every American), extended unemployment insurance, food assistance, incentives for firms to maintain employees on payroll, loans and grants for businesses, funding for hospitals and health care infrastructure, transfers to state and local governments, and deferral of payroll tax obligations. Federal student loan obligations have been suspended for 60 days and tax filing deadlines have been extended.


Tax and spending measures include:

(i) additional funding for the NHS and other public services (£5bn);

(ii) measures to support businesses (£27bn), including property tax holidays, direct grants for small firms in the most affected sectors, and compensation for sick pay leave;

(iii) strengthening the social safety net to support vulnerable people (by nearly £7bn) by increasing payments under the Universal Credit scheme as well as expanding other benefits;

(iv) the government is also launching with the British Business Bank the Coronavirus Business Interruption Loan Scheme to support SMEs; deferring VAT payments for the next quarter until the end of the financial year; and will pay 80 percent of the salary of furloughed employees (to a maximum of £2,500 per employee per month) for an initial period of 3 months.


Key spending and tax measures totalling €156bn (4.5% of GDP) include:

(i) spending on healthcare equipment, hospital capacity and R&D (vaccine);

(ii) expanded access to short-term work (“Kurzarbeit”) subsidy to preserve jobs and workers’ incomes, expanded childcare benefits for low-income parents and easier access to basic income support for the self-employed;

(iii) €50 billion in grants to small business owners and self-employed persons severely affected by the Covid-19 outbreak in addition to interest-free tax deferrals until year-end. At the same time, through the newly created economic stabilization fund (WSF) and the public development bank KfW, the government is expanding the volume and access to public loan guarantees for firms of different sizes, with an allocation of at least €822bn (24% of GDP).


An amending budget law introduced a fiscal package of €45bn (about 2% of GDP including liquidity support measures) and €300bn (about 13% of GDP) of state guarantees for bank loans to companies.

Key immediate fiscal support measures include:

(i) streamlining and boosting health insurance for the sick or their caregivers;

(ii) increasing spending on health supplies;

(iii) liquidity support through postponements of social security and tax payments for companies;

(iv) support for wages of workers under the reduced-hour scheme;

(v) direct financial support for affected SMEs and independent workers;

(vi) postponement of rent and utility payments for affected SMEs.



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The virus progression

The markets follow mortalities, as the data is more reliable than confirmed cases, given lack of testing, especially in the west. Italian and Spanish mortalities have overtaken those of China. France, the Netherlands, Switzerland, the UK and the US are seeing a pick-up in deaths. Most of Europe is in lockdown, while the UK followed other countries and some US states in declaring a curfew. Good news to focus on: Italian mortalities have reached a peak, while Chinese authorities decided to lift the lockdown in Wuhan, after more than two months, as no new cases have emerged in almost a week. Having said that, a few incidents in Hubei have worried authorities that the virus might flare up as the measures are relaxed.

How does this relate to the past? 

“This time is different”: a phrase which usually invites anathema for any who dare utter it, nevertheless aptly describes our particular predicament. In the first Quarterly Outlook of this year, we wondered what type of event would be enough to break an 11-year expansion cycle, sustained by constant central bank risk suppression. We wrote: “However, as time passes, we suspect that what may override the faith in the central banks’ ability to underwrite risk, will be a confluence of some of the [described] above risks, possibly triggered by “black swan” events.”

Less than three months later, what we are faced with now is the quintessential “black swan” event. Never since the end of WWII have businesses undergone such an abrupt shock in consumption. In a history of at least 11 big recessions since then, this is the only time where the shock is truly exogenous in nature, i.e. it is not related to a crisis of confidence which is usually concomitant with a business cycle. What ended the expansion cycle is a non-cyclical shock, a so called “black swan” event that has nothing to do with the usual boom-and-bust cycle. In the past, “black swans” were in essence the consequence of prior predictable problems, catalysing an end-of-cycle market rout. Lehman Brothers, for example, was the victim of a credit cycle that had frozen for almost a year. What was unexpected about it was the inability of the state to save it, which sparked fears of other major financial bodies (like AIG, Fannie Mae, Freddie Mac etc.) collapsing as well.

Conversely, the coronavirus threat is unique in the sense that in and by itself, without previous warning, it has caused an unprecedented economic shutdown and the fastest downturn in global stock markets in history. In retrospect, it appears optimistic to believe that it would not spread to other continents. However, the previous experience with SARS which was contained in China, and H1N1 which saw a quick development of the cure (Tamiflu) and was nowhere near as lethal, as well as the Chinese reports that Covid-19 had not spread to other parts of China, gave investors reasons to believe that life in the western hemisphere would continue as normal.

What does this mean for investors? 

As we have no historic precedent for such an abrupt stoppage of economic activity, it is very difficult to come up with analogies. This means that no matter what the stimulus is, investors still have to make assumptions about its efficacy, i.e. they do not know if it’s going to work. Additionally, previous historical patterns related to valuations, such as price/earnings, price/book, price/cash flows, Enterprise Value to EBITDA, or technical levels in stock indices may serve as some sort of psychology guide as to when investors might be tempted to turn risk back on, believing that assets are “priced to destruction”, but we can’t be certain they will tell us much about the trajectory or timing of the recovery. 

Instead as this is a health crisis, it is more obvious that the flags investors are going to be looking at will be more related to health. While this is ostensibly out of most investors’ expertise, nevertheless in the first days of the crisis markets seemed to respond to news related to possible cures.

We have identified four possible health-related catalysts which might lead to a market turnaround, ranked from the more short-term to the longer term.

  1. Development of a quick and cheap test. Proliferation of such a test could see a quicker return to economic normality. The big problem with the coronavirus is that it is very difficult to know when one is infectious, as the incubation period is long and one can be asymptomatic. Knowledge that one does or does not carry it would have to come with some sort of central data warning system, like in South Korea, which guaranteed that those testing positive would observe the quarantine. The solution is not without flaws (essentially the creation of a police state as well as the possibility of dissemination by those close to a carrier who have themselves gone undetected) but it could help.
  2. Natural flattening of the curves. This can happen because of “social distancing” measures already taken, or possibly the arrival of spring, as the weather could be a factor in the spreading of the disease. The problem with this solution is that, despite allowing a relaxation of social distancing, it still requires countries to keep their borders closed. Also evidence is scant as to whether the virus has been less prevalent in hotter countries, which casts doubt on warmer weather coming to the rescue.
  3. Development of a cure protocol. At the time of writing, several, predominantly already approved medicines or combinations, were being extensively tested to develop a protocol. While this would still require some social distancing measures, faster cures could alleviate stresses on healthcare systems and usher some return to economic normality.
  4. Vaccination. The only way a pandemic can really end is vaccination. Even then it may re-emerge in some parts of the globe (like measles or polio). However, this is the most time consuming solution as well, and the possibility of developing one before the long-term effects on the economy and our political systems outweigh the current cost in human lives is minimal.
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How will this affect the global economy?

The global economy is set for a sharp contraction (1 x quarter of negative GDP) or a technical recession (2 x quarters of negative GDP). Economists are not working with the SARS yardstick any more to understand the economic impact, but with the Lehman yardstick. But what matters more is the depth of the contraction. As the event is unprecedented in modern economic history, assessments as to the extent of the drawdown are very wide.

Oxford Economics (“The Economic Cost of Coronavirus Lockdowns”, Slater, 25 March 2020) suggests that the cost of a 12-week lockdown would be a drop of 18% to 32% of consumption for the quarter. Given that the average western economy is 80% dependent on consumption, this would be commensurate to a 14%-25% drop in GDP.

According to JP Morgan: “the U.S. economy is projected to contract by 14% in the second quarter, after experiencing a 4% contraction in the first quarter, before recovering to 8% and 4% growth in the third and fourth quarters. Euro area GDP will suffer an even deeper contraction, with double-digit declines of 15% and 22% in the first and second quarters, before rebounding by 45% and 3.5% in the third and fourth quarters.”

Capital Economics predicts a significant drop in UK economic activity: “After going through the sectors and pencilling in some large falls in activity for the ones where activity could be almost non-existent for a few months (such as air transport, accommodation, restaurants, arts & entertainment) and leaving others unchanged, it is worryingly easy to arrive at fall in GDP for the whole economy in Q2 in the region of 10% q/q to 20% q/q”. US Economic activity is set to drop by 10%-15% for Q2, at a similar pace to the Chinese experience.

Crisis or shock?

The media has been quick to dub the economic disturbance “The Global Coronavirus Crisis”, after 2008’s “Global Financial Crisis”. However, we are not sure yet that “crisis” is the right word. Usually a “crisis” is one of faith in the system, altering the way consumers behave. Whether this will happen in this situation, is a matter of time. The magnitude of the economic recession and, more importantly, of the changes it will bring to the global economic and geopolitical picture, will depend on when that end date will be. The longer the period of social distancing measures, the longer its aftereffects. What we are faced with may well be a “crisis” but it may also be a “shock”.  That the coronavirus pandemic has an end date, this is (most probably) a given. The best scientific minds and an unprecedented amount of resources have been spent to combat it. Its seasonal virus characteristics suggest even the possibility that the first wave might be disrupted due to environmental factors, giving humanity enough time to prepare for a second wave. So, medically speaking, we simply do not know for how long the medical situation will put pressure on the economy. What we do know, however, is that a recession is unavoidable. But as this is not a recession due to loss of faith, i.e. different to the usual boom and bust cycle, and also given the extraordinary monetary and fiscal stimulus to combat the problem, the question is what will the shape of the recovery looks like. There are three possible shapes the recovery may take:

V-shaped recovery: A “V” shaped recovery is a swift recovery, akin to the 2003 SARS crisis. The quicker the lockdown, the sharper the recovery.  

U-shaped recovery: A “U” shaped recovery is a longer and deeper recession, but an eventual and gradual return to trend growth. For that scenario to take hold, the lockdown will have to last for more than a month or two, probably causing second-order repercussions prolonging the downturn. Such repercussions would be a steep rise in corporate insolvencies, further pressures on the Euro or a breakdown in supply chains and important infrastructure for the countries hit the hardest.

L-shaped recovery: The so called “Greece-shaped” recovery. In this scenario, the scars from the crisis are so deep that they forever lower the long-term growth rate of the economy. In this scenario, serious second and third order effects have played out and continue to affect the economy over the longer term.

Will a recession become a depression?

Depressions are determined and characterised by lack of initiative to invest or consume. If the episode is not long lasting, and authorities are very careful with the super-powers they have assumed, then scars from this stoppage of consumption and internal confinement should not have a long lasting effect. However, the longer the time passes, and the more the temptation grow to abuse emergency powers, the more exponential the damage on the willingness to make long-term investment decisions, either at a consumer or a corporate level. At this point, a depression is not our main case scenario, just a sharp recession with a swift recovery. However, as days pass, we must take into account the psychological damage this creates. After 2008, tendencies to consume were reduced and tendencies to save increased in a persistent manner. This created a situation called “secular stagnation”. A prolonged confinement incident could have similar repercussions.  

UK Economy and Brexit

The UK economy is one of the most open in the world. Around half of both exports and imports (45% and 53% respectively) come from the EU, the region so far hardest hit by the virus. Because the issue here is one of geography, rather than administrative borders, we assume that Britain may suffer about as much as the rest of Europe from the virus itself, which would mean a similar hit to household consumption (65% of GDP) and the service sector (80% of GDP). Thus a reduction of 10% to 15% of GDP in the next quarter. Of course, we don’t expect the hit to be uniform across sectors. PMI indicators around the world suggest that services have been hit more than manufacturing (despite close proximity of people in manufacturing plants). Utility and Telecoms companies may even benefit from “stay at home” policies, while Healthcare could be a key and direct beneficiary of government stimulus. Tech should also, largely, stay immune. The manufacturing/industrial sector is set to suffer, not just from reduced demand, which had been the case before the pandemic, but also from widespread disruptions in supply chains.  Banks will once again suffer from the flattening of the yield curve, but government stimulus plans, as well as wavers of certain capital buffer rules, can help earnings going forward. Insurance companies, on the other hand, could experience a disruption in profits as claims rise. Consumer Staples, like food, should not suffer much. Consumer Discretionary, conversely, could be one of the hardest hit sectors. Energy is still much more dependent on Oil prices, which right now are near all-time lows due to increased supply and decreased demand.

The good news is that the slump reflects policy (curfews and business shut downs) rather than sentiment. Policy is easily reversible, as opposed to sentiment. The bad news is that a lot of companies, no matter what the stimulus, might need to reduce their workforce or roll back activities altogether, due to sheer lack of cash flow. The situation favours large and listed companies, which generally have enough cash available to weather storms, and are not so reliant on day-to-day cash.

The larger question is “what will the effect of the stimulus be?” The monetary and fiscal stimulus is very large, by historical standards, but given that the level of disruption is unknown, the efficacy of the plan is equally unknown.

The deceptively lesser issue is “what happens with Brexit?” Its position as the “be-all-and-end-all” rapidly declined, as the importance of the pandemic superseded it. That this incredibly difficult task is no longer a government priority, on both sides, isn’t the only major complication. There are also concerns that the question around “what is the future relationship”, which should be guiding negotiations, is muddied since Europe is now as uncertain of the answers as the UK. We feel that it is not only politically palatable, but also possibly a practical imperative that negotiations be postponed, and with them Brexit. And when it does happen, US leadership could very well be different.. If negotiations do press on, however, we feel that with both sides perhaps not concentrating on the task, probabilities for an optimal deal are reduced.

What does the world look like in the future?

Crises have defined us. 1929 was a liquidity crisis which was followed by unprecedented unemployment. After that, we empowered central banks to be lenders of last resort and mandated them to tackle unemployment. The 1970s were an inflationary crisis. After that we empowered central banks to tackle inflation as well. After the market crash in 1987, we inserted circuit breakers to avoid one-day panics. The 1990s saw a banking crisis, and thereafter we relaxed bank lending standards. In 2000, the crisis was about accounting methods and corporate governance. The Sarbanes-Oxley act fixed that and defined the ensuing recovery and corporate governance standards to this day. In 2008 it was a banking crisis. Thereafter we created a world that, no matter what, banks would be sufficiently capitalised and capital would flow.

In 2020 we see a near-apocalyptic scenario, and a very rare one where the crisis does not originate from the business environment. The additional problem is that this crisis (or shock) does not come during a time of stable geopolitics and economies. Rather it comes on the heels of a very fluctuating geopolitical environment which was already seeing the post-WWII order stretched to its limits and a stressed economic system which had not been very efficient at allocating assets over the past decade. This means that its repercussions could be far and wide. Whether a cause, a catalyst, or the straw that broke the camel’s back, this is for future historians to debate. For us, it is to try and understand what the world post-virus may look like:

Policy fallout

As far as policy response is concerned, we have to acknowledge that a massive policy initiative, dwarfing that of 2008, has been undertaken. The response in 2008, Quantitative Easing, fixed the problem at the time, credit flow, but has resulted in a lot of unintended consequences, such as rock-bottom rates for a generation, income stagnation and inequality in income distribution, which eventually turned into resentment for the status quo and caused significant political turbulence.

The response in 2020 has already been much bigger, which means consequences might be higher as well. Either the response overshoots, undershoots, or is just right. If it overshoots, growth rates versus the past will rise, but so might inflation, as a lot of money is directed towards consumers. With quickly rising levels of global debt, inflation might sound like a good idea (we can inflate it away), but to manage this central banks would have to meaningfully raise interest rates and roll back QE, which they have been unable to do for over 12 years. With heightened unemployment, governments would probably object to such a course of action.  If policy undershoots, then growth rates may not recover, even to their previous sluggish levels. Getting the policy “just right” and without collateral damage is of course a possibility, but a difficult once given its massive scope. At best, we can hope for successfully adjusting recovery policies as we go along, to balance growth, unemployment and inflation. Time is of the essence. For every day the economy remains in lockdown, the ensuing economic damage is disproportionate.

Other issues:

Debt: We expect that a world, already inundated with debt at 253% of global GDP, will experience even more elevated levels of debt, as countries expand their fiscal policies to mitigate some of the economic damage. Higher debts and lower GDP growth for the next year could see that percentage skyrocket. We believe that eventually a solution to global debt will be sought, a compromise between creditor and debtor nations. Sovereign bond investors should be ready for such a scenario. Higher tier investment grade bonds are probably still safe, after all large and well capitalised companies may benefit from the situation. This is especially true for companies with low operational leverage. But companies with large fixed costs with credit ratings of BBB and lower could suffer significantly, as their top line comes crashing down. 

Unemployment:  Unemployment will probably rise significantly as the economy is reshuffled. It is not impossible that we see a spike of 10% to 15% in major economies, although we don’t expect it to last for very long.

Banks: Bank capitalisation might weaken, as some post-2008 measures are lifted to facilitate liquidity. Governments extending credit lines mean that we shouldn’t see significant deterioration of balance sheets and risk weighted assets. If we see a return to normality, and with lower capital buffer restrictions becoming permanent, banks could see significant upside in the long-term, although may remain affected by low and flat yield curves.

Europe: The European common currency might be tested again, as centrifugal forces exacerbate underlying tensions. Already nine countries (France, Italy, Spain, Portugal, Ireland, Greece, Slovenia, Luxembourg and Belgium), which include the Eurozone’s second, third and fourth largest economies, have requested that discussions open about issuing mutual debt, a “Corona-Bond”. Italy could end up with a 200% debt/GDP. Europe was built on American patronage fostering the leadership of the UK, Germany and France over the continent. However America has withdrawn its support for the EU, the UK has left and France has been side-lined on a number of issues, especially of economic nature. Meanwhile, Spanish and Italian newspapers site the lack of European solidarity as a factor that has exacerbated the crisis and, like the UK, they wonder how useful European institutions are. Adding insult to injury, Christine Lagarde, the new head of the ECB, publically denied that it was the central bank’s responsibility to bring yields back down, effectively signalling a departure from Mario Draghi’s “whatever it takes” strategy. The statement was retracted but the seed of doubt was cast, sending yields and CDS spreads higher. Making matters worse, Germany, Austria and other European nations contended that the European Stability Mechanism was enough to counter the crisis. Forces pulling Europe apart persist and could be exacerbated if bereavement becomes generalised and even institutionalised, with grave repercussions for the global economy and geopolitical balance.

Business: The business map and practices may be re-thought, depending on length of crisis. We expect more emphasis on tele-commuting and cost controls and less emphasis on regulation, to facilitate the economic recovery. Larger and listed companies may have an advantage after the virus crisis, as they would be more likely to have a cash cushion and have retained more of their staff. Free movement of people, which as a principle co-exists with free movement of goods and had already come under severe fire, will be even more in the spotlight.

Geopolitics:  The last few years have seen the consistent undermining of global forums and institutions: from the United Nations, the World Bank or Davos, to the more influential G7, the WTO and even the EU. Institutions are formed at a particular time to serve a particular long term goal. If, for some reason, they have outgrown their usefulness, they tend to fall into disuse and are then dissolved. The League of Nations, the UN’s predecessor whose mission was to avert a repeat of WWI, was dissolved officially after just 25 years.

The end of WWII saw the emergence of the leadership of the United States as a staple in the western hemisphere. That leadership was deemed imperative by many western nations in the context of the Cold War, especially those in close proximity to the USSR. Through soft power and economic and political influence, the US defined economic systems, values and culture for many countries, same as its predecessors as world and regional powers, such as Britain, France, Spain or Rome had done before it. This state of affairs was considered so natural that it took some time for the world to realise that, under new leadership, the US was departing from its traditional role as the leader of the Western hemisphere. This was in part due to slower economic growth, which meant loss of influence, and in part due to choice.

The coronavirus is, or at least has been perceived as, a global crisis, and the lack of US leadership from all forums has been noted. Italy, a NATO country severely hit by the virus, has accepted military help from Russia. China has been sending medical supplies to stricken European countries on a daily basis with cargo planes and happily sharing medical research. At the same time, the US has been looking for more esoteric solutions.

After the end of the Cold War, liberal capitalism, imbued with the principles of both John Maynard Keynes and Milton Friedman, became unquestionably the pre-eminent economic model for the world. As China ascended, a second string of capitalism competed for dominance: state or political capitalism.

Beyond the obvious implications for all humanity, answering who will set a global set of business principles will have a profound effect for investments. China is at the technological forefront, outspending its rivals in quantum computing and advanced artificial intelligence. Recently Huawei and the Chinese government suggested a plan for new internet architecture that is centrally controlled.  

But it is lagging in terms of corporate governance. Chinese companies trade at lower multiples in global stock markets because they run on about half the Return on Assets compared with their western rivals. Accounts are often questionable and decision making is nowhere near objective western standards. More than 70% of the Hang Seng China capitalisation is run by the state, which in peace time is less efficient than private enterprise. Conversely, in those models, employment is more assured as it is deemed a social good. The same principles hold true for Russian companies. Gazprom, a global giant in oil and gas exploration, takes more than thrice the time to discover and develop a new reserve. A change from one model to the other would severely change the way businesses operate, in terms of efficiency, transparency, job retention or enterprise.

The pre-eminence of the US in already existing structures and the US Dollar’s position at the heart of the global financial system prevents such a radical shift in the status quo as we described, at least for the time being.  When this crisis is complete, the image of the Yankee soldier who freed Europe in WWII that had become the foundation for institutions like the UN Security Council, NATO and the EU will fade. Whether a restoration is on the cards has to be seen.

What can investors do?

In the face of such cycle-end volatility and potential paradigm shifts, investors are left with three choices: (i) meaningfully reduce risk, (ii) meaningfully increase risk and (iii) maintain risk levels. To meaningfully reduce risk would make sense in the face of increased uncertainty, but it would leave investors exposed to a sharp rebound. Increasing risk at lower valuations would assume that high valuations of the past will be repeated, subjecting them to anchoring bias. If indeed we are faced with a paradigm shift, then past valuations and high points (or low points for that matter) cannot serve as reliable guides to the future. Assuming that asset allocation was fairly balanced and sufficiently diversified coming in to the crisis, it seems that best practice may be maintaining the current balance and relying on the sustainability of long-term diversification principles, even in the face of persistently low yields and perhaps different valuation anchors.  

How did our investment committee react?

Our investment committee deliberated numerous times during this crisis. While we agreed that the cycle is probably over, we feel that long term asset allocation principles and balanced portfolios are enough to weather the storm. Whether we are in fact looking at a storm or an incident preceding a wholly new normal, it remains to be seen. We are still slightly overweight equities and significantly underweight bonds. We are still in favour of large-caps vs small-caps and investment grade vs high yield bonds. We also maintain a diversification in alternatives and gold. Assessing risks is difficult in times of uncertainty, so diversification is the key to protecting assets.


With the notable exception of WWII, no non-market event has ever moved markets significantly over an extended period (after the attack on Pearl Harbour, stocks were down 7% in the next two days and near twice their value as the war was nearing its end). During the Cuban Missile Crisis, when humanity found itself one step away from nuclear obliteration, and people were building nuclear bunkers in their basements, stocks fell 1%. The only time Wall Street has ever really closed down was in 1933, when President Roosevelt declared a 12 day holiday for banks, to prevent a domino of bank runs, and for a week after 9/11.

Capitalism has survived the Cold War, a Nuclear Crisis (1962), a change in the monetary system and ensuing inflation (1971-1985), a global banking crisis (1990), the bubble (2000), 9/11, and a financial breakdown in 2008. We expect that this crisis, which does have an end date, will eventually see the continuation of the system. However, policy makers around the world will be pressured to re-think some of the less efficient consequences of modern capitalism, to make sure resentment of the status quo is eventually alleviated.

In the meantime, we can no longer view stock and bond markets as fully functioning to raise and allocate capital. With over 1 billion people virtually in house arrest, including in New York and London, it is difficult to consider market movements as fully “efficient”.  Investment meetings are mostly taking place for maintenance and M&A activity is freezing. Fund managers will be watching their holdings, mitigating losses wherever possible, but probably won’t be investing significantly until more clarity has been reached. We don’t believe that major investment decisions will be made by people who are locked in their living room. Thus, we cannot look at traditional market metrics, such as valuations, to flag a possible recovery or take market movements hereafter at face value.

Important information

All sources: Refinitiv. The information contained in this document is believed to be correct but cannot be guaranteed.  Opinions constitute our judgment as at the date shown and are subject to change without notice.  This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided Mazars Financial Planning Ltd accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.

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