Webinar: Navigating the Coronavirus recovery

21 July 2020

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Watch the latest webinar, Navigating the Coronavirus recovery from Trevor Greetham from Royal London Asset Management

Trevor Greetham, Head of Multi Asset at Royal London Asset Management (RLAM) presents his latest quarterly update, reflecting on the impacts of the Coronavirus crisis, how he thinks the recovery might shape up and how he'll be navigating this in the multi asset funds he manages.

 

 

Adam Vaites:

Hello everyone and welcome to the latest webinar from Royal London Asset Management. To introduce myself, I'm Adam Vaites, part of the wholesale team here at RLAM, here with my colleague, Trevor Greetham, Head of Multi Asset, over 25 years' experience in asset allocation. The webinar is entitled Navigating the Coronavirus Recovery, so we're going to give you a market update on the [unclear] and GMAPS from Trevor and we're going to talk about what's happened over the last quarter and then we'll move into a bit of a Q&A discussion in terms of what clients have been asking us over the past week. So, Trevor, over to you. The ship is a bit steadier since last time we spoke.

Trevor Greetham:   

Yes it is. Thanks Adam, thanks everyone for sparing the time today. We're going to cover a few different things in this webinar, so first of all just a quick overview. The Royal London multi asset funds, the governed portfolios and the global multi asset portfolios, the GMAPS, are designed to beat inflation over the long run through an efficient, diversified mix of assets and with active management, both in terms of underlying security selection and some of the Royal London funds we're using, and tactical asset allocation.

We're very conscious of the fact that our asset mix has lagged some of the less diversified competitors we've got during this COVID shock and in particular, the weightings we have in UK equities, property and commodities have resulted in some underperformance versus funds that may be more focused on global equities and long dated gilts. So, we'll talk a bit about that as we go through because I know that's on people's minds.

What I would say, though, is that what we've designed here is a diversified mix of asset classes that is trying to keep you and your clients ahead of inflation over the long run at different levels of risk and we might be heading into a more inflationary decade. If you look at the politics, the fact that governments are getting much more involved in government spending, central banks are out there actively trying to pump inflation up at the moment and there's all that debt to try to inflate away.

I don't think now is the time to move away from these inflation hedges and we think the diversified mix of asset classes that we use will be in good stead over the next 10 years as the upswing takes hold. But we do see some risks in the short term. I'm actually quite optimistic longer-term; we will get through this virus period, there'll be lots of stimulus left in the system and the investment clock, if you like, has been reset. This is a new economic expansion ahead of us.

But there's lots of two-way risk in the short term. At the moment, we're broadly neutral on equities, overweight high yield bonds, emerging markets and technology, but not really actually sticking our necks right out in terms of equity markets either going up or down in the short term. I'll explain why as we go through. So, the structure of the webinar will be a quick overview of the portfolios, coming back to that crucial point about strategic asset allocation and our asset mix, and then tactical asset allocation and the outlook.

So, just a reminder: the governed portfolios, there are nine of them, determined based on long run risk targets as you can see here, either an adventurous, a balance or a cautious journey, and it can be used for life styling or people often select individual portfolios. They launched in January 2009. The ones that are shaded are the ones that we then launched in [OIC] form as GMAP funds, the global multi asset portfolios launched in March 2016.

The middle four of them map up to particular governed portfolios, the GP3 and the GP6, 5 and 4, and at either end you've got a pure equity portfolio, the dynamic fund that looks like global managed in the Royal London pensions world. At the other end of the extreme, we have the conservative fund, which is a fixed income fund which maps together with the annuity fund that some of your customers may be using within the Royal London pensions.

Also to mention of course the retirement income portfolios, the GRIPS, which launched in 2012. They're trying to maximise sustainable income. Then just mentioning in passing the launch we made in November 2018, the multi asset strategies fund. That's slightly different; it tries to limit downside in volatile markets through diversification, through active positioning and through volatility management. I'll touch a bit on that again in a moment, but that's actually a fund that rather than working around a strategic asset mix, has an objective of cash plus 4% per annum of fees returns on a rolling five-year basis.

So, what's performance been like? Well, here's the long term track record of the governed portfolios, looking here at GP6 on the left hand side. Superimposed in red, you'll see GMAP balance, which is the equivalent GMAP fund, so I'll just make the point that the performance between the governed portfolios and the GMAP portfolios is extremely tight because they have the same benchmarks and the same portfolio management team implementing strategies. You can see there was a bit of a drawdown there, a hit in the first quarter of the year and a bounce back.

On the right hand side, you've got a longer track record of the investment clock approach which includes what feels like ancient history now, the time I spent at Fidelity prior to joining Royal London Asset Management. So, I'd say that track record's a long track record, limited downside, good upside capture. You can see that the funds have started to bounce back, not as much as global equities or technology stocks, but they've started to bounce back.

If we look at MAST, MAST hasn't been going so long. This is a simulation of the strategy going back to the mid-1990s, the black line here is the simulated return and the shaded period is the current period. So, MAST also saw a drop, about 15% in total, like a mid-range multi asset fund in Q1. MAST has seen a more gradual recovery since then because volatility still remains very high and this fund is extremely focused on limiting downside risk, and as a result it's not rushing back into equity markets because [it still feels] pretty frothy at the moment on a day-to-day basis.

Well, what are returns looking like year-to-date? They've been around the houses a little bit, but you can see this sort of patchwork quilt of different asset classes in different years and some of the numbers may be a bit hard to read on your screen; they're quite hard to read on my screen. But just the highlights here that so far year-to-date UK government bonds, gilts, are the best performer. They're in the top right-hand corner of the picture. The 10-year gilt yields fell to a very low yield there.

Stocks globally are flat, more or less, in sterling terms and that's boosted by the tech sector in America doing really well, but it's also very much boosted by the weakness of the pound. The pound's been really weak this year, so all the overseas holdings have been inflated. UK equities are doing pretty badly in that picture, so UK equities are near the bottom of the pile. They were hit very hard, they underperformed.

Commodities have also been pretty poor and have bounced back and UK property prices have been declining, not catastrophically so at the overall index level, but they're down about 4% or 5% as well. So, some of the things which we actually include with reasonably high weight in our asset mix, UK equities and property to single two out, have definitely been underperforming gilts and global equities, and we're very conscious about that. We don't design these funds for short term time periods but we think very carefully about their performance at all times and we're always reviewing those asset class weightings.

So, let's talk about strategic asset allocation a bit more. First of all, taking a little bit of a step back: what's it all about? Well, we think that strategic asset allocation is a long term process. We're trying here to balance risk and reward over the long run, apportioning assets according to individual goals and risk tolerance. In the case of the governed portfolios and GMAPs, we're trying to maximise long run return ahead of inflation at given levels of risk.

So, that means having a sensible approach. We want to include assets that provide resilience like gilts and commodities and avoiding exotic or expensive investments, which actually have done really badly in this crisis, like peer to peer lending or aircraft leasing or any of these very leveraged structures. We want to diversify, so we want to have as wide a universe as possible, so we're mixing assets together.

If you look at the sort of things we include, UK stocks, overseas stocks, property, commodities, gilts, credit and cash, the sort of things that will do well in different scenarios to give you a bit of extra resilience. So, you might have a portfolio that doesn't include commodities, say, but if you look at what happens to commodities and stocks during a geopolitical crisis - an example shown there on the top right hand side of this slide is the 1990 Gulf War - commodities go up as stocks go down. So, you've got a bit of extra resilience by including commodities, even though they may not perform as strongly as stocks all the time.

We also like to include more than one type of real growth asset, so we don't just have the stocks, we also have the commercial property and sometimes commercial property sails through [at bear] market and stocks, for example in the early 2000s, without really any difficulty at all. So, we like to have this broad mix.

Looking at UK exposure in particular, there's been a lot of pushback on the fact that about half of our equity exposure is benchmarked to UK equities. Again, like everything else, this is based on long-term analysis. So, for a UK investor, UK equities are slightly lower volatility than overseas equities. On the table on the right hand side, there's a long-term analysis all the way back to 1987 and it shows that if you blend UK and global equities together, you get a similar return but a lower volatility.

That's one of the reasons when we're looking for [accretion] portfolios for a sterling-based investor, you will see more UK equities than the rest of the world. It may be small consolation, but the chart on the left hand side shows you the relative performance of UK equities versus the world. They're in red, so a pretty consistent, steady underperformer which has accelerated to the downside in 2020.

The purple bars on that chart are our tactical positions in UK equities in the Royal London funds, and you can see we've been consistently underweight in equities, particularly in 2020 the UK's been our largest underweight tactically. But given our strategic mix, we still carry a heavier weight in the UK than many other funds do. We're always reviewing these things and we will think quite carefully about the structure of the fund going forwards in our next strategic review, but this is why the UK is a larger weight than it would be just based on a market capitalisation analysis where the UK's only 5% of the global markets at the moment.

I mentioned property. You can see here property, which is the red line, compared to UK or global equities in grey or purple. UK equities, by the way, are the purple line. This is again going all the way back to the late 80s and you can see UK and global equities have had a similar performance over this long timeframe, and in fact in the first half of this timeframe, the UK was actually outperforming the world. It's only in the second half of the timeframe that the UK's generally been an underperformer, so UK and global equities have very similar long-term returns.

Property in red also is quite similar, it's another growth asset likely to give you an inflation beating return over the long run. You'll notice as I mentioned a few minutes ago the 2000 recession which is roughly in the middle of that picture, that shaded vertical bar, property just sailed through. There was no bare market in property. So, property can be a great diversifier in different circumstances.

It's been a deflationary decade, though, dominated by the slowdown in China. The bars we're looking at on this chart are from our investment clock indicators and you can see that for inflation - this is the inflation scorecard - it's generally been pointing downwards. The red line is the consensus growth estimate for China, how much the Chinese economy's expected to grow by over the next 12 months, and that's also been generally declining and dropping very sharply obviously with the COVID crisis.

So, we've been in an environment where inflation's generally been surprising on the downside, it's been very disinflationary. That's been quite good for financial assets, but it may not carry on like that, and there are reasons to believe we might see a more inflationary decade ahead where having a broader range of asset classes in your armoury would make sense. So, the two things really to point to here in terms of a suspicion that inflation will be quite high over the next decade.

Firstly, there's massive fiscal stimulus in the system. The left hand side of this page looks at the fiscal response to the coronavirus pandemic around the world. We've never seen anything like this. The IMF is estimating the fiscal stimulus at the moment is roughly 10% of global GDP; it's really very, very dramatic. What's interesting is, it's happening at a time when you're also seeing dramatic QE. If you look at the central bank balance sheets on the right hand side of the page, this is actually very different from the great financial crisis in 2008.

I remember at the time when QE was first being used, people said quantitative easing is going to create hyperinflation and I was saying to people, no, it won't create inflation because the banks are destroying money. The banks were calling in their loans in the credit crunch. When a bank makes a loan, it increases the money supply. When it calls a loan back in again, it shrinks the money supply. So, yes, the central banks were printing money, but I likened it to a sinkhole opening up at your feet, a monetary sinkhole, and the central banks were shovelling soil in to try and keep the road level.

What we're seeing this time is the banks haven't withdrawn their loans, the banks have continued lending, often with government guarantees, and you've had QE, so the money supply has absolutely skyrocketed. In America, the US [unclear] money supply's growing at about 30%. This could be inflationary and if it is, you'll value having commodities, you'll value having real property and you may even value having UK equities with its heavier resource weighting.

So, moving on to our tactical positioning and many of the things I've just told you that you will value we've been underweight tactically. But basically what we've seen is a very unexpected, very sudden end to a long expansion. It was the longest economic expansion in American history. What's probably followed it is possibly the shortest ever recession in American and global history because the economy's slumped in March, and in America's case bounced back really quite strongly over April and May in response partly to the extraordinary policy response but also because of the easing back of social distancing measures that we saw over that timeframe.

So, you've had this quite large V-shape move in stock markets, but for the last month or so, you'll notice they've been going sideways a little bit more. Very much feeling two-way risk because now although over the long run I'd be quite optimistic that we'll get through the virus, we'll get through because of a vaccine or because of gradual immunity building up, in the short term there's lot of uncertainty and we're seeing this big surge as we'll see in a moment in virus case numbers in America which makes it quite likely that we're going to see consumer spending dip again.

So, we're taking a flexible approach to equity exposure and we still see good tactical opportunities elsewhere. Our framework's based around tactical models; you'll see the diagram on the left hand side, things like the investment clock which I'll talk a little bit more about in a moment. So, we have a very strong analytical framework that looks for factors that help you make decisions in different strategies, we test them back over a 20-year time period, but we've put them through a human team-based fundamental decision-making process before we implement.

So, on a daily basis, we're reviewing the tactical models and if we have conviction to do something slightly different or we'll say something like, well, the model wants to buy equities but we know the virus numbers are picking up, we can implement something slightly different. We think that's very important to have that accountability and that human check, the human final decision on what to do to invest.

We aren't divorced from the models, we created the models so we understand them intimately and therefore we know their shortcomings. They work for us, we don't work for them. So, there are times when we will do something slightly different and at the end of the call maybe I can give some examples of that.

If you look at our simulation of these tactical models going all the way back to 1992, many of you may have seen this slide or something similar before. We simulate what the different strategies would have contributed if we'd implemented them as designed since 1992 and the picture on the right hand side, the multi-coloured layer cake, is the cumulative added value the different strategies would have generated over the period of about 28 years now.

It annualises about 2% added value a year. We know there are shortcomings of that test. We generally say to people what we're trying to achieve is an average of 1% a year from tactical asset allocation, but being aware of the fact it can be quite lumpy. You'll see in the middle of that picture that quite vertical period in 2008/2009 when the tactical models added about eight or 9% over a two-year period, and that obviously brings the averages up.

What you'll see at the top right-hand corner of that picture if you're looking closely is a drop and that's what we suffered over the first quarter of 2020. So, we were overweight equities and high yield and those two strategies at the top there, the cross asset strategy overweighting equities and the credit strategy overweighting high yield bonds were both hit when the coronavirus crisis began.

But you'll notice the other three strategies actually sailed through it quite happily, so our sector strategy continued to add value, our regional equity strategy's been adding value and our currency strategy was pretty much unimpacted by the crisis. That's why it's good to have multiple strategies at your disposal. That pull back in the tactical allocation contribution, it does actually wipe out the flat period that preceded it. We were gradually adding value over the last two or three years, but on a tactical basis now, taken from this moment, we've wiped out that three-year gradual added value and we're back to roughly flat or slightly down over three years.

We're not being dismayed, we believe in our process. We look at this picture and we don't think this is broken. We also are willing to cut ourselves a tiny bit of slack for the fact that these sorts of models could not have predicted a killer pandemic like this coming out of the blue. But we obviously kick ourselves that we didn't sell sooner to override than we did, although we were selling in early March, faster than the model was.

We were very active in our tactical asset allocation. I'm not going to go through all of these slides, but just to give you a flavour of how active we are, we're not day trading but we're very carefully controlling our exposures and adjusting them as probabilities shift. We've got very careful risk control on all our positions as well, and these four different pictures give you an idea that since we launched the GMAPs and since we implemented this sort of tactical strategy in the governed portfolios, what sort of overweights and underweights we had, either at the cross asset strategy level, regional, currency or sector level.

Quick thoughts on the outlook: I mentioned it was the longest economic expansion in history and this is a chart showing you the average length of the business expansion. This one was 10 years and nine months. That was the longest period without a recession in US history. We obviously had a very sudden shock in March; you can see that VIX volatility got up to levels last seen at the time of the Lehman crisis. Volatility still remains very elevated at the moment and investor sentiment, which was telling you you should be buying or at least covering your short positions at the end of March, is now neutral.

So, sentiment isn't really helping you, if you like. You've had that big bounce back caused by the stimulus and caused by the fact there was a deep panic going on, but at the moment the market could really go either way, sentiment's neutral. The upside to the market - I've touched on this already - comes from the reopening going on and the sheer amount of stimulus in the system. So, in the left hand side of the picture, you can see the Citibank surprise index, which measures whether economic data's surprising positively or negatively, and it was obviously a very negative surprise in March, but in May, June into July it's been very positive.

Also on that left hand chart shown in red is the scorecard indicator that helps us judge where we are in the investment clock, and again, that's improving. So, there is an economic reopening going on for sure and that helped to cause the [melt-up] in markets we saw in late May going in June. On the right hand side, you can see what M1 is doing. That's a 30% surge in the money supply that we've seen in America, very different from all the other post-recession periods shown on the picture.

So, those are your positives and the investment clock, which went down to the bottom left-hand corner, a disinflationary slump, is now tracking upwards quite rapidly, with the growth starting to pick up it's almost serious inflation pressure. So, if that opening just carries on and if the consumer globally just ignores what's going on with the virus, then you'd expect stocks to continue doing really well. There's a but, and the but is that you are seeing a surge in virus infections again in America.

The chart on the right hand side shows you new infections and then in red it shows you deaths from coronavirus on a different scale. You can see that this surge we're seeing at the moment in infections in America is actually bigger than the one we saw in March. It's a really serious business. We think there will be a pick-up in deaths, unfortunately, particularly in the southern states and in California, and that can result in a further retrenchment of the global consumer.

On the left hand side, we've got some very high frequency data from Google on mobility, and again it looks a little bit like a recovery that's only gone so far. In all the debates about the recovery, will it be V-shaped or U-shaped or L-shaped, what we've been saying to people is we're expecting more like a square root symbol. It starts off like a V, it goes down and back up again, and then at a certain point it just stops and goes flat. It feels like that's what we're potentially seeing at the moment where there's been a bit of a reopening but because the virus is still out there, because we're seeing this big surge in America, the consumer could actually if anything go flat or even go down from here.

In the near term, I am a bit pessimistic about the virus because the Office of National Statistics does a random survey where they're actually testing people in the UK to see if they have coronavirus antibodies, and you'll find this on their website, the most recent update was about a week ago. As of a week ago, 6.5% of us have antibodies, which isn't very many. In the early stages of coronavirus, the Chief Medical Officer was saying you had to get to 60%, six zero, to get herd immunity where the virus just dies out.

Now, we might get a vaccine some time next year, but if we have to wait for herd immunity, we're about a tenth of the way through this journey. So, my medical friends all tell me this is a marathon, not a sprint, and we could see quite a lot periods of pick up and then relapse in the global economy until we get to the stage where either we're immune to the virus or we have a good vaccine widely available.

So, if we're broadly neutral stocks and having this flexible view, we could go either way on stocks. We are consistently positive on high yield. We stayed overweight high yield in quite large positions through the crisis. This graph looks at high yield spreads with a bank lending survey. High yield spreads are in purple and you can see they spiked and they're coming back down again. The red line hasn't come down again yet because it's only a survey taken once a quarter and it's asking banks what their view is on lending.

So, banks were very panicked in March, but when we next see this, I think we'll see banks very happily lending still because of all of the government support they're getting. So, high yield bonds look very sensible to us as a way of retaining some positivity about the longer term, particularly as the form of monetary ease we've seen in this crisis is very much targeted at credit markets. The banks were too big to fail in 2008 and the banks got bailed out to try and keep lending going in the economy.

Over the 10 years since 2008, the credit markets basically took over from the banks as being the main source of finance for US companies and they became enormous. When the coronavirus crisis hit, it was a cashflow crunch. The credit markets were in turmoil. Azhar Hussain, who's our global high yield manager, said that March 2020 was actually worse in terms of managing high yield bonds than any month he can remember through the financial crisis 10 years ago.

Central banks knew this and so the banks were too big to fail in 2008, the credit markets were too big to fail in 2020 and a trillion dollars of Federal Reserve money is earmarked to go into buying US investment grade bonds, so-called fallen angels, which are now junk rated, and also some of it's actually targeting the high yield market itself. That says to us that these spreads won't widen out very much, even in a relapse, and we'd like to hang on to high yield exposure.

Other relative value trades we have on - we have good conviction but just not at the equity level. Within equities, we've stayed overweight technology, we've been overweight the technology sector practically through sector futures consistently since we've put the strategy on in September of 2019. The graph on the left hand side shows you the relative performance of technology in purple and in red is the relative earnings stream. This isn't a dot com bubble, it's not on the never-never, there is a strong relative earning story for technology and the drop in long term interest rates improves the valuations.

On the right hand side of the picture, you've got the UK equity market, again, showing its underperformance; it's there in purple and the red lines is the earnings trend. So, the UK's been underperforming because of a poor earnings trend. It's got quite a bit of value at the moment and if we saw a more inflationary decade, its earnings trend would pick up. So, the big drop we've seen in 2020 is partly the energy sector, but you can understand that being along technology and being under our UK equities are something that come out from this sort of investment process.

So, wrapping up, you can see that this is the slide and where we're overweight and where we're underweight. We're very slightly overweight stocks as we speak, but only very slightly, and quite flexible on that. We're consistent overweight in high yield. We're underweight property. You'll know the property funds generally around the market have been suspended because of uncertainty over valuations. As we've seen consistent inflows to our funds, we've let the property weights drift lower and as the stock markets have risen, the property weights have drifted lower, but we're fairly comfortable with being slightly underweight property at the moment.

Also, slightly underweight to neutral commodities and then regionally emerging markets in the US being overweight. Emerging markets really on the back of China, which has had a much more successful virus experience than the rest of us, and underweight the UK. So, I think that's the end of the formal bit of the presentation and Adam, would you like to pass on some of the questions you've been getting from people?

Adam Vaites:           

Yeah, thanks for that, Trevor. It certainly was an unexpected end to the expansion and quite interesting the sentiment indicators currently saying neutral and, as you say, quite uncertain times ahead. Thank you for all the background there. We'll lead into the Q&A and the questions we've been getting from clients. I suppose quite a punchy, challenging question here is, why didn't we buy more aggressively in March? Talk us through that, please.

Trevor Greetham:   

Why didn't we buy more aggressively? Well, if you think back to what was happening in late March, the models that we look at were actually wanting to be, if anything, underweight equities. What we were saying at the time is that sentiment is so stretched and so depressed that we didn't want to be short equities, because we thought when the stimulus came through, there would be a big rise in markets.

So, what we've done is we've cut out positions to a small overweight and when the first bounce back came, it was really quite unpredictable and very sudden, so you could have actually [caught] the bottom several times before it actually did happen. So, it's always extremely hard to catch that initial part of the pickup. It's also worth bearing in mind, and this was something we were definitely talking about at the time, that there was speculation this crisis was so severe that financial markets could close. Some of the markets in the far east actually did close, supposedly, for a deep clean.

But Andrew Bailey, the Bank of England governor, was quoted as saying, it is not yet the time to consider closing the stock market and that didn't sound like a big enough denial to us so we didn't really want to try and be heroic about buying aggressively at the bottom and then find financial markets were actually closed for a while and we were stuck in that position. So, we moved back towards strategic weights in equities and waited to see what happened and then when we've seen the further pickup with the reopening, we've been playing that in different ways.

So, we've played that through high yield, we played that through our sector weighting and our regional weighting, so we've been taking advantage of the pickup but we haven't wanted to aggressively overweight equities because of the deep uncertainty that we're still seeing. I do have this very positive longer term view, though, so you'll probably find I have a tendency to want to buy dips, but those dips could be quite big.

Adam Vaites:           

Thank you, Trevor, that all made sense. Just moving it forward in terms of you talked about the property weighting and we're underweight currently. What's performance been like on the property side?

Trevor Greetham:   

Well, different property funds have dropped different amounts, but the ballpark figure is three to 6% drop this year. I think the IPD index from that slide we showed earlier on was down about four-ish, so it's not an absolute collapse, it's nothing like the financial crisis. There are signs of life coming back here and there, so I know the material uncertainty clause that meant that property funds had to suspend has been lifted for City of London offices and also for industrial sites. So, these are warehouses used by the likes of Amazon, which have been doing really well recently.

So, we'll wait and see what happens. It may well be that the property market starts to function a bit more before too long, but in this environment we're fairly comfortable being slightly underweight property. We don't see much sign of property suddenly surging and it will take some while to get our heads around collectively what the usage of some of these sectors will be like, high streets and offices, in an environment of continued virus risk.

So, we love the asset class over the long run, it gives us good diversification, it's another good generator of real returns for UK investors, but we're quite comfortable being slightly underweight at the moment.

Adam Vaites:           

Thanks, Trevor. Bit of a political, economic question: a lot of clients  talking about higher taxation next year and the furlough scheme going on to October. Any views your side on the economy going forward into later this year into 2021?      

Trevor Greetham:   

Well, there's a few things to say, really. The first is that I'm watching very closely what happens to the furlough scheme because I suspect there will be an attempt to wind it back that will fail. So, I think the markets will be very sensitive to signs of the consumer retrenching because of further virus infections and the markets will also be extremely sensitive to signs of stimulus being wound back, and the furlough scheme's a good example of that.

Maybe they're successful in winding it back, but if they do, I think we'll see a very big rise in unemployment in the UK and I think that could be reflected in a weakening in the pound. So, tactically, we're underweight the pound at the moment and that could be the way that's reflected. If globally there are signs of stimulus being withdrawn, I think it will be reflected in global stock prices and again, I think policy makers would end up blinking and continuing the stimulus.

It's an unusual situation because if you like this really sharp recession we've seen is of government making because we were told to stay at home. So, they feel some moral responsibility to keep things going because they told us to stay at home - arguably not their fault, but that's where we stand and it's being talked about as the war on COVID in the same way people talk about actual military conflicts. Under no circumstances you just take it on the nose and let government debt go up, and that's what I think's likely to happen, so I think the furlough scheme we'll see, but I think generally stimulus there'll be attempts to wind it back which probably won't succeed.

We've got to get through Brexit. It seems to me that we're very likely to get either an extremely thin trade deal or no deal at all. That's going to be a problem for UK economy because what you need at the moment is to try and encourage companies who've had this massive drain on their cashflow to hire and to invest and one of the things that deters hiring and one of the things that deters investment is uncertainty. If they think they've got this big problem over supply chains coming, that could hamper things as well, so we've got some problems in the UK.

Longer term, I think there is a bit of a risk of inflation because you could say that tax rises are the way to pay this debt back. You could say it's austerity, although this conservative party is not the Philip Hammond conservative party or the George Osborne conservative party. I think rather it's more likely government spending stays quite high and as a result inflation starts to build up and governments end up eroding their debt burdens through inflation, rather than through austerity or tax rises.

That would require central banks to be captured by government, so I wouldn't rule that out. It feels like an independent central bank is one of those relics from yesteryear, of liberal economics. It may well be that central banks are leant on and told to keep bond yields low even though inflation's rising, and that's what I'm concerned about. So, it does make me quite positive on gold and on index-linked bonds because if inflation rises, the yield will get low, we'll make good money in index-linked bonds and in gold.

Adam Vaites:           

Thank you, Trevor. We're actually - just for our audience, do speak to your Royal London consultant or BBM, we do have some good articles on inflation, actually, so could follow up there. You talked about banks too big to fail in 2008, credit markets too big to fail in 2020. A lot of talk of, are we in an artificial bubble at the moment and are the markets artificially high? Have you got some thoughts on that?

Trevor Greetham:   

Well, it makes me nervous because I remember very well - I was thinking about it earlier today, actually, how in 2008 - well, in 2007, actually, the credit crisis started as you remember in July/August of 2007 with a couple of cash funds having to close, and you got a big drop in the stock markets in the third quarter of 2007 and the senior loan officer survey, you saw that earlier on with high yield spreads, became awful. The banks just basically all got [snarled] up in the summer of 2007.

The central banks cut interest rates and by December 2007, the FTSE and the Hang Seng were at new highs. This was obviously just the beginning of a three-year bare market, but that initial six-month period, the market dropped then it rose back again. We could be in that same situation, so we could be in a situation where we've had the stimulus, we've had the bounce back, but actually now what sets in is this feeling that the economy's gone flat, we're never going to get back to where we were for a while, the virus is a slog, it's a marathon, not a sprint.

I'm not ruling out that there's actually a bear market still ahead of us, so there is an element of artificiality to what's going on and that's one of the reasons why we've not been so keen to participate in this rally at the moment. I do think we'll get through it, but I think it's a bit complacent to say just because there's lot of liquidity around, there won't be a solvency problem if people just can't get back to doing what they were doing before.

Adam Vaites:           

Very valid points, absolutely. Final question from my side is, obviously you talk about the coronavirus and the second wave possibly that a lot of experts are predicting later this year. How are we positioning ourselves for this and you talked a bit about the outlook earlier, but specifically about that?

Trevor Greetham:   

Yeah, well I guess the final thing to say on that would be that arguably what America's seeing at the moment is still their first wave because they didn't clamp down hard enough. Obviously, Trump is pretty much encouraging them not to clamp down hard enough in the first instance. I think you will see further waves and, in some cases, you'll get further lockdowns and the markets will be sensitive to that. So, as I say, the market's going up in May into June wasn't so much about stimulus, that was about the reopening of the economies that was going on.

We were a bit more overweight equities at that time, and you will see markets being quite sensitive to short term dips in consumer activity and recoveries. I do think though that governments will do everything in their power to avoid as complete a lockdown as we saw in March of this year, and one of the reasons for that is that they've had time to expand capacity in the health service and they've had time to get supplies in of PPE or ventilators.

It's a bit gruesome, but do you remember the early discussions about flattening the curve? The idea wasn't to prevent people from getting COVID and to prevent people from dying from COVID, because unfortunately a lot of people will. The idea was to flatten the curve so that it didn't go above the capacity of the heath service to deal with them. So, I think we'll have a steady drumbeat of COVID for some time until a vaccine's found, and it may well be that if there is a second surge, you don't get a full lockdown but you get certain small areas being told to lock down or you get people told to shield.

It may not be as economically damaging as the first round was. That first round was just, slam the brakes on, we're not ready for this, and it bought a bit of time and it may well be that we've adapted a bit better and we can cope. Those of us on this call [unclear] are probably working remotely. There's a been a big adaptation going on in the world and I don't think we'll get hit quite as hard by a second surge as we were the first, but by no means would I say we're out of this. I think it's quite a long slog ahead.

Adam Vaites:           

Thanks, Trevor. Yeah, I think a lot to happen and let's hope we find a vaccine [unclear].

[Over speaking]

Adam Vaites:           

We shall see. Thank you very much for your time, I know it's extremely hectic at the moment and thank you for everyone who's tuned in to listen. If you do want any further information, you can go to the Investment Clock website or please do contact our support team; Scott, Christian, Oliver or Charlotte, their details are just on there now with their email addresses and phone numbers. Or please contact your usual Royal London contact and thank you for everyone's time. Thank you very much.    

Trevor Greetham:   

Thanks for your time.

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