Investment Blogs

Please see this weeks ‘Markets in a Minute Update’ from Brewin Dolphin:

Markets

Global shares mostly rallied last week on hopes of a vaccine and continued lifting of lockdowns. In the UK, the FTSE100 nudged through the 6,000 mark for the first time in three weeks, before falling back on Friday as tensions between the US and China flared up once again.

Last week’s gains*
• FTSE100: 3.4%
• Dow Jones: 1.7%
• S&P500: 1.44%
• Dax: 3.65%
• Nikkei: 1.44%
• Hang Seng: -3.4%
• Shanghai Composite: -2%

Most markets in Asia closed up yesterday and were heading up today – even Hong Kong where the Hang Seng closed up by 1% on Monday. In early trade on Tuesday, most global markets were making solid gains due to optimism caused by more easing of lockdowns.

*Data to close on Friday May 22

US/China tensions

Last week China proposed the imposition of national security laws from Beijing in the special administrative region of Hong Kong, restricting freedoms of speech and the press. This move has increased worries about threats to democracy in Hong Kong that had formerly only really been subdued by the onset of social distancing. This has caused protests from the US and threats of retaliation, as well as public protests in Hong Kong by pro-democracy demonstrators. The Hang Seng, fell last week as a result. China will vote on the proposed legislation on May 28.

Trump has promised retaliation

President Trump said he would respond very strongly to what he sees as an assault on democracy in Hong Kong. He is most likely to consider tariffs, although he will be mindful of whether that is in his interests ahead of the US election in November. One conciliatory note from Premier Li Keqiang was a continued commitment to the phase one trade deal reached last year, but we are sceptical that China can really abide by its terms.

Even so, most Asian markets rose yesterday, with the best gains in Japan, as expectations increased that the nationwide state of emergency will soon be lifted.

Stimulus news

UK
The Bank of England has raised the prospect of negative interest rates for the first time. It has said the policy is under “active review”.

Bank of England MPC member Sylvana Tenreyro was probably the most outspoken of a number of MPC members, who coalesced around the position that negative interest rates could be considered in the UK. Tenreyro cited Europe’s experience with negative rates as demonstrating that they have a powerful effect on real activity, but nobody outside the MPC seems to agree. However, with Governor Andrew Bailey and Chief Economist Andy Haldane insisting that negative rates could be considered, we have to take them at their word, although market pricing reflects only a slim chance that negative rates could be introduced in 2021.

China
Premier Li Keqiang also suspended China’s growth target to facilitate a shift towards job creation as a priority. China’s GDP target had low credibility anyway, with the eventual GDP report assumed by all to be massaged to fit with the target rather than the other way around.

Europe
Stimulus news in Europe was more positive, albeit only tentatively. Progress on a €500bn aid package crept forwards as Germany reached an agreement with France that the aid could take the form of grants, funded by debt and secured on the EU budget. To finally ratify such an approach will need the consent of all members and it is expected to meet resistance from other northern European states.

Economic activity may have bottomed

Backwards looking data continues to paint a bleak picture. The UK claimant data last Monday showed the number of people claiming unemployment benefit jumped by 856,000 in April, to a total of 2.1m, according to the Office for National Statistics (ONS). This implies a jump to circa 6% unemployment when April’s official rate is released. Friday’s retail sales data indicate a decline of more than 18% in April compared to March, taking us back to activity levels last seen fifteen years ago (over which time the population has grown by about 10% or 6 million people).

However, more current “high frequency” data, such as energy consumption, road traffic etc, shows activity levels are improving. Therefore, we can take heart from the fact that we are at the nadir for economic activity and the path ahead is very likely one towards recovery from here.

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These updates from Brewin Dolphin provide a good weekly ‘snapshot’ look at the markets which is useful given the current volatility we are currently experiencing.

We try to capture a wide range of fund managers and investment experts opinions such as Brewin Dolphin to give you an overall consensus view of the current climate we are in.

Andrew Lloyd

27/05/2020

This piece is cut and pasted from an investment update from Legal & General Investment Management today (18/05/2020):

J P Morgan also flagged up the management (or lack of it) of coronavirus in the USA as a potential issue/significant risk in their market update last Wednesday afternoon.

Steve Speed

18/05/2020

Interesting input from the Jupiter Independent Funds Team below received on Friday evening 15/05/2020:

Jupiter Independent Funds Team

Data this week revealed the extent to which the government’s response to Covid-19 has left its financial projections in tatters. UK GDP in the first quarter declined by 2%, and in the month of March alone by 6%, but both only include one week of the lockdown. Second quarter figures to the end of June are likely to be closer to those projected by the Bank of England and The Office of Budget Responsibility, both of which see the economy shrinking by around 25%-30% over those three months. 

As cash flows to the Treasury reduce significantly (PAYE, business rate and VAT deferrals for companies, reduced duty income from fuel sales, air fares and property transactions, lower VAT receipts from retailers etc) but outgoings increase rapidly (e.g. the furlough and business interruption loan schemes), the Chancellor’s estimated 2020 budget deficit has blown out from £55bn at the time of the Budget in early March to £340bn and possibly even up to half a trillion pounds only 9 weeks later. The current furlough scheme to cover the 80% of the salaries of 7m employees (capped at £2500pm per person) costing £14bn per month is already more than the £12.5bn the Chancellor initially set aside in the Budget for his total Covid-19 lifeboat plan.  

We crossed the Rubicon last week in another sense too: that was the point at which more than 50% of the UK’s adult population became financially reliant on the state, either as public sector employees, or because they’re on benefits, or, now, they’re beneficiaries of the furlough scheme. The public sector has a vital role to play in society, however as harsh an observation as it might be particularly in current circumstances, that sector is not economically productive. The private commercial and industrial sectors create economic wealth and generate growth: it becomes an uphill struggle for any economy to grow when only a minority of the population is able to contribute to wealth creation (which, in circularity, includes the ability to pay for public services).

Labour’s manifesto pledge in the 2019 election to nationalise Royal Mail, the utilities, rail companies and BT’s Open Reach, and paying out PFI contractors in public services, was forecast to cost £450bn over 5 years. That would have incurred structural, long-term debt which they planned to recoup principally through higher taxes. Our present predicament which has arrived in relative terms in the blink of an eye is of the same order of magnitude but with the additional substantial headwind of a thumping great recession, the biggest in nearly a century. Within the constraints of the virus, it is not difficult to see the economic and political imperative to get the nation back in to productive employment. The Chancellor must ensure that the substantial debt the government has taken on is temporary, or at least transitory, and not structural. The longer the debt sits on the government’s balance sheet, particularly in the absence of recovery or growth, the greater the risk the international ratings agencies which assess governments’ creditworthiness take a dim view of the prospects. In that event, our national debt faces the possibility of being downgraded which immediately pushes up the cost of financing, not only for the government itself but also companies and individuals (e.g. for mortgages, car financing and credit card interest), all when the economy is least able to afford it. It is easy then to create a downward spiral. There will be difficult choices to make about how best to reduce the debt burden including cost savings and tax. But ultimately, the best way is to recover and restore growth. The state has made significant interventions to protect livelihoods as well as lives; it must now ensure that it is equally willing to let go again to ensure as far as possible that the debt burden is indeed transitory and not structural. With Labour and the Unions urging a New Social Contract, repaying the ‘debt to society’, it may be easier said than done. Time will tell!

We are living in interesting (challenging) times now but the future, how we recover and what society will look like are being impacted on by this pandemic and the response of our politicians and the people.  Hopefully, society will be fairer in future.

Jupiter Independent Funds Team manage the Merlin range of funds. 

Steve Speed

18/05/2020