Editor's letter

Markets haven't finished yet

Can the bear market really be over so soon? The consensus seems to be “surely not”.

Japan: surprisingly high yields © Alamy

Is that it? For weeks we have been told to watch the data around new infections from the coronavirus. The second they look to have peaked, said pretty much everyone, the market will turn. And so it was. Markets started to move back up ten days ago. At the weekend, we got some suggestion that locking down 35%-plus of the world’s population is sort-of working. Infections may be peaking and Pictet’s Luca Paolini notes that global Google searches for information on Covid-19 also look to have peaked, suggesting global panic might have too. Either way, markets soared. By Wednesday morning most had recovered 20% from their lows. 

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But can the bear market really be over so soon? See this week's MoneyWeek magazine for Jim Rogers’ view, but the consensus seems to be “surely not”. There is a chance the recession might not be as bad as some think (I’ve seen forecasts for a second-quarter collapse in US GDP of 40%). Intertemporal Economics’ Brian Pellegrini notes, for example, that most of the modelling around how economies perform in pandemics was done long before large parts of the population were equipped to be as productive at home as in the office (listen to our podcast with him for more). 

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Yet there is an awful lot that, post snap back, doesn’t seem to be fully priced in. There are the obvious nightmarish statistics – the US has lost ten million jobs in the last two weeks, roughly the same as it lost over the entire global financial crisis. But less obvious are the mega macro trends, such as the rise in the reach of the state and its power over the corporate sector (dividend controls are not a good thing for governments to be getting interested in), or the acceleration in the retreat from globalisation and its possible consequences (inflation being the obvious one – see Edward Chancellor, Matthew Lynn and for Philip Aldrick in this week's magazine).

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So how do you invest into this deeply uncertain environment? We’ve already looked at how to maintain your dividend income now that (according to Link Asset Services), 45% of UK firms have already scrapped 2020 dividends. That’s £25.4bn lost – around a third of last year’s total – and a high chance of more to come. With that in mind, we reckon you should be thinking of Japan as a high-income investment destination. I discussed this with market strategist Russell Napier in our podcast on Friday, but the key point is this: UK yields are clearly on the way down – fast. But in Japan, cash levels are high (53% of firms in the Topix have net cash) and payout ratios low: dividends shouldn’t fall. That could make the 2.3% yield available on, say, the Jupiter Japan Income Fund look very nice indeed. 

If you want a more globally orientated fund, Max looks at the Smithson Investment Trust, with its concentrated portfolio of very high-quality global mid caps. Right now, he reckons, is probably one of the best chances to buy you will ever get. For those who prefer individual stocks, Jonathan Compton looks at increasingly underrated UK mid caps to buy and hold for the long term, while Mike Tubbs looks at a biotech that might just have a treatment for Covid-19. Finally, a reminder that you should make sure that whatever you buy you are properly diversified. If you don’t know what’s going to happen next, it’s best to prepare for almost anything.




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