Richard Tomlinson – Interview
The duration of our liabilities is in excess of 20 years, so we can take a longer-term view.
So are there buying opportunities around? That’s the million-dollar question. There may be some interesting opportunities developing but I would be cautious as this year could be interesting in certain pockets.
Assets are cheaper and a lot of bad news has been priced in, but I wouldn’t make the Herculean call to say that we have reached a bottom. I would urge caution on attempts to try and call a bottom at this point until we have more clarity on the depth and length of the economic pain in- flicted by the virus.
What you can say is that you have enor- mous policy support. Central banks and policymakers will continue to do whatev- er it takes. A turning point will be when the lockdowns end because they are caus- ing significant economic damage.
The 2008 crisis started unfolding in the financial sector whereas this crisis has hit the real economy directly. Absolutely. In some ways the real econo- my is less equipped to deal with such shocks. In the financial sector, central banks can deal with finance, liquify banks, address IG spreads and rewrite solvency rules. Regulators and central banks can do all of that quickly, but it is much hard- er to support small, privately-owned busi- nesses which have been forced to close. Governments and policymakers could, of course, help to address this but the logis- tical challenge, especially with most peo- ple working from home and infrastruc- ture not being geared up to work remotely, is more complex. There will be a way through this but it’s going to take a little more time. What I am watching out for primarily is the situation in the US and to what degree it is deteriorating.
US labour market figures from the end of March suggest further deterioration with
6.6 million people filing for unemployment benefit.
It has been slightly overused, but the old adage, ‘when the US sneezes the world catches a cold’ is still relevant. Once we can see how the US will get through this, and it is a question of when, we will see a significant resurgence of confidence in the global outlook.
So the question is will the crisis last for weeks, months or, perhaps, years? From a financial markets point of view, the fireworks we have seen will start to come under control. There is another widely used saying that comes to mind, ‘when central banks panic, markets start to calm down’.
That does not mean that the real economy will recover at the same pace. I am talking quarters here, hopefully not years. We dis- cussed this with our senior investment managers to see how we’re viewing the continuum of probabilities between a V- shaped, U-shaped or L-shaped recovery. The V-shaped is looking less likely, the U- shaped is somewhat of a probability and the L-shaped is somewhere in the middle. Markets could see a V-shaped recovery if central bankers are successful, but we will see the damage to the real economy for quite some time.
What could asset managers and consult- ants do to help steer pension funds through this crisis? First, good communication. Second, don’t panic. Third, evidence-based decision making. Fourth, don’t try to be a hero by making big calls on market tops and bottoms. There is huge uncertainty in what we are dealing with here. If you told me eight weeks ago that we’d be able to buy US investment-grade credit at index level 300 basis points plus, I would have said, “I’m in”. Now I won’t make a market view, which has more to do with policy rather than the underlying credit quality. You have to be mindful of that while there are
assets around that look incredibly appeal- ing based on price that we are in a differ- ent paradigm. People using models con- ditioned on the last 10 years’ worth of data need to be careful, especially with those who started managing money after the last crisis.
What will the world look like in a few years’ time? With luck we will have established a clear way of dealing with the virus and the issues around it. Life will hopefully return to nor- mal. This could potentially be resolved by the end of the year but the effects on the economy could linger on for longer. I hope markets stabilize and return to normal levels. You’d hope that this won’t inflict too much damage on the real econ- omy but there are many businesses that won’t be around in a few years. We are at the stage where policymakers are discuss- ing on what terms they are going to save businesses and that is potentially going to be defining for this crisis. We will come out of this crisis, but some businesses, depending on where policy- makers sit, could end up with different capital structures. From one extreme, the nationalisation of airlines. Either way, we must make sure the recov- ery is fair. That is going to be loud and clear in many politicians’ minds. So there will be a lot of challenges around how bailout programmes are structured and how small businesses will be supported. I feel for people whose business or income has almost evaporated overnight.
In 2008 there was a paradigm shift in the way the State interfered in the financial sector. Could we see such interference in the real economy this time?
I am not making any predictions here but just think about airlines and government policy on climate change and what might win political kudos? Who knows? Don’t underestimate human ingenuity, you have to be hopeful that this too shall pass.
Issue 92 | April 2020 | portfolio institutional | 19
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