Another New Normal?

With more than 45 years' industry experience Keith is well-placed to look back at how large scale global events have helped shape the present in this first of a series of COVID-19 articles.

In those last 46 years there have been all sorts of events which have had serious implications such as stock market downturns and recessions and no one event is the same as another. My first experience of these was in 1974 when I had just started my first senior appointment in the industry. There was no accompanying health crisis but the bear market of 1973/74 is widely regarded with the 1929 Great Depression and the 2008 Global Financial Crisis (GFC) as the worst market downturns in history. The FT 30 fell by 73% the Dow Jones by 45% UK inflation rose to 25% by 1975 (US inflation 12.3% 1974) and GDP fell by 6.2% and 9.3% respectively by 1974.

The UK property market was in major crisis and the Bank of England had to react to the resulting secondary banking crisis by assisting approximately 60 banks at a cost of around 100 million. There was also an oil crisis and industrial unrest in the UK coal mining industry which led to shortages of electricity generation and the UK government introducing a three-day working week to conserve electricity supply in early 1974. In 1976 James Callaghan Prime Minister had to go cap in hand to the IMF to obtain a US$3.9 billion loan with the Bank of England at one stage having to withdraw from foreign exchange markets.

When I hear the phrase 'the new normal' in reaction to the COVID-19 crisis I can't help reflecting how all these events force society to adopt new measures which become the 'new normal'. I'm not talking about the tragic effect which this virus has had on those who have died or lost loved ones but how it affects our business and our clients. The same applies to many other economic downturns and geopolitical events during those 46 years.

If you consider the events around 1973/74 the economic effect was arguably even more extreme than today but we have the uncertainty of what the future weeks months and even maybe years might hold.

I think the first thing to say is that the industry as it stands today bears no resemblance to 1974 in all sorts of respects invariably for the better. I have thought a lot about this current situation and as you say the risks and opportunities. I spend a lot of time reading and listening to commentary by experts including portfolio managers and economists and thinking what this means for our clients and their assets and some of the potential scenarios end up looking similar even if each event has its own individual factors and causes. Take some examples of what is happening now:

• Government borrowings the quantum of economic support packages are huge multiples of what were thought to be financially irresponsible just a short time ago but that has become 'the new normal'. Commentators worry about increased taxation and inflation. I cast my mind back to 1974 just to add to the woes I have set out above Denis Healey was the Labour Chancellor of the Exchequer in 1975. He famously said that he would tax higher earners at 75% on their top slices of income and 'squeeze the rich until the pips squeak'. He also threatened to introduce a wealth tax which never materialised and introduced Capital Transfer Tax (CTT) to replace estate duty with a maximum rate of 75%. The cause of the state of government finances at the time were very different to those we face today but the overall effect and the tools available to governments to fund and service the level of debt remain similar. There is currently much discussion about how these support packages will be funded and talk of increased rates of taxation.
• Although the 1974 UK market crash was then followed by a 150% increase it took until the late 1980s for investment values to reach their previous highs only for another significant crash to take place in 1987. Can our clients expect a sustained rapid recovery which we have seen thus far from the Q1 decline of 29%? We are in uncharted territory and no one knows the definitive answer.
• What will we have learned from remote working during the COVID-19 and what impact will it have on how we operate our clients' services in future? A three-day working week in 1974 must have been crippling for some businesses and as far as I can recall there were no government rescue packages in those days. This is an entirely different challenge with opportunities for clients employers and employees as we move forward.

Countries have reacted with diverse policies and strategies to COVID-19. How will those affect client choices in future? Back to 1976 and the IMF loan for the UK which I mentioned earlier which was a humiliating event and may well have contributed to a change in government when the Conservatives under Margaret Thatcher won the 1979 General Election.

There are so many potential consequences from the current crisis that they cannot be covered here but we can start drilling down into those next time when I will talk about some real life examples of experiences I have had of the aftermath of some other economic crises.