May 2020

As May has come to a close, it has seen widespread easing of lockdown measures around the world. It is yet too early to gauge how the virus will react to such measures and to what extent a second spike will emerge. It is likely that waves of new infections will occur, but the hope is that they will be localised and more easily contained, given experiences of the last few months. The world appears to have moved from uncertainty and despair of the situation to a phase of learning to live with it – at least until more effective treatment is developed, and a vaccine is ultimately found. Markets have responded accordingly, with the wild swings of March and April, calming in May.

We have been spending time assessing the nature of this crisis, relative to others. The financial crisis in 2008 could be considered a systemic shock – which changes the whole level of the stock market. Everyone gets poorer and it is bad for us all. The other type of shock is idiosyncratic, where the effects vary across different sectors, different parts of the economy and across the world – and investors have to decide who are the long-term winners and who are the losers. It is this (systemic) type of shock Central Banks are desperate to avoid. We have seen from the policy response to COVID-19, that huge attempts are being made to stop this idiosyncratic shock becoming systemic.

The rise in the value of risk assets (equities) since the market bottom in March, has been led by those companies best placed to either capitalise or weather the effects of COVID-19. These have been sectors such as technology, consumer staples and utilities. That still leaves a big part of the market relatively close to the lows of March. As (bad) luck would have it, it is those sectors that have not fared well in the years prior to the pandemic that have been hurt the hardest – financials, energy and industrials to name a few. These sectors have been firmly in the value camp for a number of years now, with valuation dispersion (relative to quality/growth business) now at historically divergent levels. Favouring ‘value’ stocks (which offer a useful level of income and an underpinning of asset value) over ‘growth’ stocks, has been a winning approach over the very long-term, but this has not rewarded investors over the past decade. Whilst a number of businesses in these sectors are in poor condition, there are pockets of real opportunity emerging – and it is these areas that we are assessing, with a view to a partial allocation of capital in favoured managers best place to exploit such opportunities over the medium-to-long term.

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.


Second Quarter 2020

The Health of the Nation.

The Coronavirus (or Covid 19) has struck at a time when the global economy was slowing in any event. Various forms of fiscal and monetary stimulation failed to reignite the global economy. Now, despite record low interest rates, sluggish growth globally has slid into recession thanks to the economic shutdown in containing the virus.

Understandably, the UK government has been reluctant to commit to alternative options to the lockdown in the absence of definitive scientific evidence – which will likely only fully surface as the outbreak fades. There are serious conflicts to consider. Initial indications suggest the vast majority of deaths are occurring in the elderly, and that the young and working age population are relatively exempt. Soon, other voices will increasingly be heard from those without work, who are left in a precarious financial position.

To put the scale of economic distress in context, this financial setback is already of a similar scale to the financial crash of 2008 when the global banking system nearly came to grief. The world now ponders how to emerge from this crisis and here there may be some cause for optimism. As nations recover virus free health, there is a good case for economic revival as well. To date, the impact of the huge government stimulus to the personal and corporate sector has yet to make its mark. President Trump may not have been far wrong when he planned huge infrastructure spending, but this has fallen foul of the change in balance of power in mid-term elections. Jeremy Corbyn’s seemingly excessive public spending plans now look trivial compared to current spending by a right of centre government.

This is likely just the beginning of a government spending work programme to tackle mass unemployment. The likely outcome, rising inflation. Often feared as a route to impoverishment for those on fixed incomes, it may be the best way to reduce the real value of global debt, which is so great it stifles the route to global economic growth at present.

We believe that one way to protect portfolios in the current climate is to invest in Gold and gold shares and to buy bonds with inflation protection. This gives us the opportunity to be on the best footing, while looking for value in equities. Any return to normality may be delayed by uncertainty in the global banking system and money markets – until there is clarity, for example, in the stability of the Italian financial system.

Our belief is that the near meltdown in 2008 is fresh enough in everyone’s minds to extend the mutual co-operation we have seen in tackling Covid-19, to the financial challenges ahead. If not, then further volatility is to be expected. Our hope would be that the world is on the way to repairing the type of balance sheet recession that occurred in Japan for two decades. A good bout of Keynesian reflation could work wonders and propel real assets to higher values; and this would normally include good quality equities.

Opinions constitute our judgment as of this date and are subject to change without warning. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it may go down as well as up. Interested parties should seek advice from their Investment Adviser. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority. Registered in Scotland SC231678. Registered Office Edinburgh Quay, 133 Fountainbridge, Edinburgh EH3 9BA.

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