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Suspension of disbelief

This latest twist in the Covid-19 crisis takes it to a more surreal level than the Groundhog Day we were already living. It is like a Hollywood disaster movie, except that what once required of its audience what’s known as a willing suspension of disbelief is now a reality. 

Now, though, it seems to be markets rather than movies where suspending disbelief is required. Once again major indices have bounded upwards this week, seemingly detached from the grim reality we face. The trigger for the latest market surge has been better news from badly hit areas – Italy, Spain and New York – and some talk of bringing lockdown to an end in the foreseeable future. Thus, the thinking goes, economic activity will return to normal much more quickly than had been anticipated. 

This seems more a refusal to believe what is happening than a rational assessment of the economic carnage we can see. A sign on a local business I walked past spoke of being closed “for the unforeseeable future”. There is more truth in this linguistic slip than I have heard from many commentators, because the immediate future is not foreseeable right now. I will repeat: we have no idea how long this crisis will last, and what it will ultimately inflict upon business activity – especially if we must adapt to living with Covid-19 rather than beating it. Japan, held up as the beacon of battling the virus, has now declared a state of emergency, months after its first case; it has said that only “basic economic activity” will continue. 

Even beyond the basic, economic activity that has been switched off abruptly cannot simply be switched back on again, as Phil Oakley points out, especially if certain aspects of lockdown continue. That means company earnings will not bounce straight back to previous levels, and cannot be forecast with any certainty – if indeed they ever could. Similarly, suspended dividend payments will not simply be resumed if companies start to take a more cautious approach to cash management in case Covid-19 flares up again. Rushing back to normal may feel like a step forward but could end up being more than two back. 

Even if you are of a more optimistic mindset, good risk management would surely demand that you do not discount this worst-case scenario – remember that we are now experiencing the worst-case scenario that many blithely dismissed just over a month ago, and which has rendered much of our annual review of the FTSE 350, published just two months ago, barely relevant. We’ve now updated it to reflect the enormity of the change we have experienced in recent weeks, and built an online resource of every company to help you keep up. Given how unpredictable the world is right now, I can safely predict that we will be updating it frequently in the months ahead.