The financial system gets reset

Right now, the UK stockmarket is cheap. Our 15-year-average CAPE (cyclically adjusted price/earnings ratio) is 13 times; our trailing p/e 14; our price to book 1.8 times; and our dividend yield 3.8%. Early this week, Schroders’ Duncan Lamont calculated those numbers to be 11, 10, 1.2 and 6.8%. At any other time I would tell you to rush out and buy. Fast. Some analysts are doing just that.

John Cronin of Dublin-based Goodbody reckons March 2020 may well go down in history as “one of the best all time opportunities to go long equities and banks particularly”. He isn’t alone: a lot of the analysts we respect are starting to see value in the wreckage. Do we? Not quite yet.

John and I consider ourselves cynical market old hands. We’ve had ringside seats at a lot of crashes. If you asked us a month ago what could surprise us, we would have said nothing. It’s never different. We would have been wrong. This time it is different. I have endless reports clogging up my email from the market’s one-track-minders. The crash is about tech valuations. It’s about demographics. It’s about interest rates. It’s about the populist pullback from globalisation. It’s about the build up of debt in the global economy.

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But it isn’t actually about any of those things. Sure, an environment of high debt and some silly valuations isn’t the best place to start. But this is still not about anyone’s long-term hobby horses. It is about the fastest, biggest fall in demand any of us have ever seen – and how long that lasts, a question to which we have no answers.

One thing I think we can say, however, is that when we look back, we will see this as a period of financial reset. One in which the market returns to its role of price discovery – and possibly even rational prices; in which the great bond bull finally does come to an end (there is no way that the huge fiscal stimuli on the go will not end in inflation); and in which wealth is redistributed around the generations (the equity price collapse effectively takes from older decumulators and gives to younger accumulators).

It might also be one of political reset. The huge (and necessary) financial bridges being built now to tide workers and firms over (hello, helicopter money – see this week's cover story) will be hard to reverse. That universal basic income is on the way in the US under a Republican president and here under a Conservative prime minister is, as Bill Dinning of Waverton puts it, a reminder of the upside-down world we live in. But that is just the start. The virus is (further) disrupting relations between China and the US. It is reminding us that in a crisis nations like to have borders. And it is putting the euro at risk (how can it survive absent a common eurozone fiscal policy?).

None of this is to say we aren’t looking at valuations. We are. We are interested in UK banks, in energy, in some travel stocks and in some of the trusts on huge discounts (if no firms will go bust as a result of the crisis, are some of the micro-cap trusts just too cheap?). And while it hasn’t covered itself in glory yet, we are very, very glad we hold gold. Finally, a warning. I have a feeling that financial fraud will rise sharply over the next few months. Loss and panic create the perfect environment for it. Even the richest and most powerful of us can get scammed. Take care.