Articles

With the continued proliferation of the coronavirus, the world is clearly facing a health emergency which is unprecedented in most of our lifetimes. As of yet, it is too early to tell the full extent of the economic consequences it may have, but they will be far reaching. 

The spread of the virus has already led to travel restrictions, an increase in people working from home, and school closures are expected to become increasingly commonplace. It is consequently inevitable that this will lead to a sharp global economic downturn, at least in the short term.

The aviation and tourist related industries have already been hard hit by the travel restrictions and cancellations, but we can expect this disruption to extend to the wider economy in due course, with a slump in both consumer demand and business investment affecting most of the economy.

The oil sector, which we do not invest in on ethical grounds, but which is still a big part of the UK market, has also suffered from the breakdown of OPEC+ and effectively a price war between Russia and Saudi Arabia, in the face of slumping oil demand as coronavirus impacts global travel.

Only a month ago the equity market was hitting new highs despite a fragile economic backdrop, but it has now fallen sharply as investors have factored in the economic implications of the virus outbreak. In terms of the UK equity market, we have experienced a fall of over 25% year to date, with other European markets off a similar amount. Meanwhile the US has proved a bit more resilient, but has also come off sharply.

We can expect that the economic disruption caused by coronavirus is going to hit companies hard, leading to significant profit warnings, earnings downgrades and indeed dividend cuts over the next few months. The medium term outlook is more uncertain. We have already seen, and expect to continue to see, strong action from the policy makers to support the economy including interest rate cuts, increased fiscal spending and tax cuts alongside more unconventional policy measures.

Despite this, for charities with longer investment horizons maintaining equity exposure remains a valid strategy, as equity markets should at some point recover, and will then look attractive on valuation grounds with prospective dividend yields at high levels, even if we do expect significant downgrades.

In contrast to equities, fixed interest has performed strongly with investors putting money into safe havens. This has led to yields on government bonds falling across the curve, with the 10 year down to around 0.2% and with the short end moving briefly negative intraday. The Bank of England has already cut base rates by 0.5% to 0.25% and further cuts may occur in due course.

For charity investors with strong risk aversion, the fixed interest market is one to consider and within our offering the Amity Short Dated Bond provides a higher yield than cash but with very limited risk option. Our Amity Sterling Bond Fund provides a higher yield but may be subject to a more price volatility.

The Amity Balanced Fund for Charities provides a mix of both fixed interest and equity exposure, including some of the more defensive areas of the market such as green energy and infrastructure funds. For this fund, we will continue to look towards paying a high and sustainable level of income regardless of the volatile backdrop.