With governments across Europe gradually easing lockdown restrictions, the critical question many are asking now is, what’s next?
The decisions and actions that national and regional govts are taking in relation to Covid-19 are having impacts on internationals in Europe, from perspectives of health, safety and wellbeing, on our ability to work and earn money, and financially, both short and long term.
In the immediate term, many countries’ governments are offering financial support for those that are suffering financially. This can be in the form of cash payments to companies and small businesses, guaranteeing commercial loans and deferral of tax payments.
In some markets, banks are offering the option of reducing mortgage payments or taking a mortgage holiday. This is not free of course, you will have to pay it later, but it might take the strain off your household in the immediate term. It is worth checking what is available to you in the country in which you are living, in Europe.
It is not just the short term. The actions and decisions of governments will also have a long term impact that you should be mindful of. We are in a unique market position, driven by a virus, not by financial or economic levers causing a downturn. Governments and banks are spending immense amounts to maintain their economies. The ECB €750 billion plan, the German government has a €750 billion stimulus package, the French government has €300 billion in commercial loan guarantees, and the US has committed a staggering $2 trillion to support the economy. But what does this mean for you?
We saw in March and April how external factors can impact the markets and your investments. The volatility also reinforced our philosophy here at Black Swan Capital- that you should be focusing on your long term objectives and not short term market movements. March saw the fastest 20% market drop in history up until the 20th of the month. Then in April, stock markets recorded their strongest month since January 1987.
Government spending and central bank commitments to support the economy will have longer term consequences with the excess cash in the market. What we don’t know yet is the impact it might have on medium term inflation but we don’t expect there to be substantially rising inflation immediately. We do know that central banks remain committed to keep inflation low at 2-3% and that they are willing to go lower than that and even negative if they feel it will stimulate the economy. We also know that the impact of the increased cash running through the economy could be muted by the reduced spending at the consumer level as both demand and supply are lower due to fewer opportunities to buy and fewer people out shopping in stores. We do think though that the medium term result of the cash injections into the economies might be shown in higher taxes on the other side of this crisis.
One interesting consideration is that governments have shown their willingness to support stock markets through cash injections, favourable loans or bailouts, offering extra stability to equities. The other side of this activity is that each government has to find that money from somewhere, be it through higher taxes, printing more money or borrowing in the form of bonds, raising the potential for possible defaults. This reduction of stock market risk could be moving bond risk higher over the coming years.
What does all this mean? It shows that the markets in which we live, work and invest are interrelated and that at times like now where we are adapting to this COVID-19 pandemic, that government and central banks are having a more direct impact on markets and our lives.
In the short term we expect to see this reflected in market volatility, but we are not particularly concerned about whether we may or may not be at the bottom of the market cycle, whether it might drop another 10 or 20% in the next quarter. What we are concerned about is ensuring your portfolios are adjusted to the current market dynamics and that they are in line with your long term goals. If your timeline is 10 years or more, it is less important if the market bottomed out in March 2020 or will do so in the near future. We don’t know what is going to happen tomorrow, but we can help you position your investments so that they are adjusted for the market volatility and remain in line with what you need, long term.
With a focus on the long term for your investments and a closer eye on your short term cash flow and spending, we believe that is the prudent approach.