Page 37 - DIY Investor Magazine Issue 24

OUTLOOK
1) OPTIMISTIC SCENARIO
In the optimistic scenario, as our understanding of the virus grows, the fatality rate declines.
Restrictions on movement begins to be lifted in May, and retail and leisure sectors return to business; the number of defaults and business closures is limited.
There could be a short term rally in trusts exposed to UK domestics later in the year; these companies were cheap heading into 2020, thanks to concerns around Brexit, but had started to pick up as the outcome seemed likelier to be managed.
There could also be a quick bounce backs in trusts with energy and materials exposures, and our feared government interference in the banking sector could be limited.
The rise in UK government debt would be relatively limited and the government could take the ‘austerity’ route out (as it did after 2008 and the Napoleonic Wars).
2) PESSIMISTIC SCENARIO
In a pessimistic scenario, tests show that few of us have immunity from the virus.
Lockdown lasts for months, and more businesses exhaust government schemes before going under.
Restaurants and bars are less frequented, with this trend lasting for years as consumers remain frightened.
UK government debt increases as firms taking government loans go bust.
We think the longer the lockdown lasts, the more likely potential GDP growth losses become permanent and the harder it is for the government to make nominal GDP rise higher than its interest payments.
Inflation would then likely seem the only way out for the state (as it did after the second world war) and cash savers would suffer.
The underperformance of value would be exacerbated, while banks and energy companies struggle.
Trusts with higher technology weightings would outperform, but may well do so in either scenario over the longer term; bonds would finally meet their nemesis.
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37 DIY Investor Magazine | Apr 2020