Please see article below from AJ Bell Youinvest received 30/07/2020
The growth of China’s consumer economy
The country could stoke domestic demand to become more self-reliant
Thursday 30 Jul 2020 Author: Tom Sieber
In the last decade or more the Chinese economy has undergone a significant transition as it moves away from an infrastructure-driven and export-reliant economy to one fired by domestic consumption.
This change can be tracked by looking at how the country’s current account surplus has moved to a deficit. Broadly speaking a current account surplus means an economy is exporting a greater value of goods and services than it is importing.
Having peaked in 2008 when China truly lived up to its reputation as ‘The World’s Factory’ the surplus has declined significantly.
There are several factors underpinning the growth of the consumer economy, one being a natural offshoot of the maturation of the Chinese economy. A larger Chinese middle class is more likely to have disposable income to spend on products and services at home.
In the short term at least, exports have been hit by the coronavirus crisis as demand has dried up and trade routes have been affected by lockdown restrictions. Chinese tourists who might have taken their renminbi overseas are also shopping domestically instead.
There are signs China wants to move further in this direction as it looks to become more self-reliant. This may reflect pressure on the country and its businesses from other countries concerned about its growing global influence, and about its recent actions in Hong Kong and in the immediate aftermath of the Covid-19 outbreak.
A report by the Chinese Academy of Social Sciences, a think tank closely affiliated to the state, suggests the next five-year policy plan – due for 2021 – should prioritise home-grown innovation and look to tap into a substantial domestic market.
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Please see below the latest market update article from Brewin Dolphin – received 28/07/2020.
Markets in a Minute: Equity markets lose ground as investors seek safe havens28 . 07 . 2020
Global share markets struggled to hold on to recent gains over the past week as tensions between the US and China escalated, with tit-for-tat consulate closures in Houston and Chengdu. There were also signs that the rebound in the US economy was waning, with initial jobless claims rising for the first time since March. Increasing coronavirus cases in numerous countries added to worries.
Bond yields fell, the gold price hit a record high as investors looked for safe havens and the US dollar fell to its lowest level for two years when compared to a basket of other currencies.
Last week’s markets performance*
FTSE100: -2.64%
Dow Jones: -0.75%
S&P500: -0.3%
Dax: -0.63%
Hang Seng: -1.5%
Shanghai Composite: -0.54%
*Data for the week to close of business on Friday 24 July.
Holiday chaos
Markets started the week cautiously yesterday. Asian shares were mixed, the US rose, but equities in the UK and Europe lost ground. The FTSE100 closed down by 0.3%, and the Eurostoxx600 index also fell by 0.3%. Travel stocks shouldered the worst of the losses on the back of the government decision to impose a two-week quarantine on travellers returning from Spain. It had a knock-on effect as many travellers to other destinations cancelled their holidays fearing a similar last-minute change to the rules. But the UK was not alone; France also warned against citizens travelling to Catalonia, and said those returning from a list of 16 countries outside the EU would be subject to mandatory testing at the border on arrival.
Dollar woes
We have been calling a decline in the dollar for some time now and it has fallen against virtually everything over the past week, especially when compared to the euro which is continuing its strong run. Recent data suggests that the European economy is performing better than the US, and given European interest rates are negative, while they are still (just) in positive territory in America, investors perceive US rates have further to fall, putting downwards pressure on the dollar. The euro gained 0.95c yesterday to $1.17.81, above the $1.17 level for the first time since late 2018. The pound also strengthened 0.7% to $1.29.01.
Dollar exchange rates
Virus news
While global case numbers continue to rise, driven largely by emerging economies, there have been renewed spikes in numerous locations including Japan, Hong Kong, France, Canada, Germany and, of course, Spain. However, it is the progress of the virus and policy response in the US that will have the greatest impact on the global economy.
In that sense at least, there were hopeful signs in the US that new infections were peaking, and there are several factors which suggest that the economic impact of the virus in the coming months won’t be as severe as it has been in the past.
Firstly, the rise in cases is partly explained by the increase in testing. That means the headline case number is less worrying and it also means more people who know they are infected can self-isolate and be treated.
Hospitalisation rates have been lower and are falling. That means more minor cases are being identified and people are self-isolating, and it also suggests that high-risk groups are isolating to keep out of harm’s way. Additionally, those who are hospitalised are getting better faster. Treatments have improved and the ICU mortality rate has declined. All these factors suggest that repeating the total lockdowns seen earlier in the year is not a viable option.
Stimulus deadlock
While the EU eventually approved its €750bn recovery package after a marathon summit early last week, US Congress is still debating how to proceed. The Democrats approved a bill for $3trn in additional stimulus two months ago, including a proposal to keep paying the $600-a-week in extra unemployment benefits until the end of the year. The payments are due to expire this week.
Yesterday, however, the Republican-controlled Senate unveiled a $1trn plan that involves cutting the $600-a-week benefits to $200 in September, then setting unemployment benefits at a maximum of 70% of the claimants’ most recent salary. The idea is to make sure that nobody earns more for staying at home than they would going to work.
However, the Democrats said the plan fell far short of what was needed to ensure the US recovery stayed on track, and said the cut to benefits was a “slap in the face” for the 30m Americans relying on unemployment payments. The two parties are now negotiating a compromise.
Road to recovery
While recent economic data has generally been better than expected, that trend has been less pronounced in the UK than other regions. Although the initial purchasing managers’ indices for July show activity is improving, the data is only relative to the previous month and so does not really tell us a great deal other than things aren’t quite as bad as they were in June.
While the direction of travel is welcome, there’s every reason to expect the UK recovery to be slow as the job retention scheme is unwound over the coming months.
We compared the Office of Budgetary Responsibility (OBR) and US Congressional Budget Office (CBO) forecasts for UK and US GDP respectively. They anticipated that the US will reach its pre-COVID level of activity in 2021, a year ahead of the UK.
Brexit and trade deals
The current state of Brexit negotiations also implies a slower trajectory for the UK. Whilst opinions differ, the market views any frictions between the UK and EU as inhibiting UK economic activity. Last week the Telegraph reported that government insiders are resigned to the fact that they may be trading with the EU on WTO terms in 2021. The FT reported that the government are equally resigned to the fact that a trade deal with the US will not happen ahead of the US elections this year (and therefore will be pushed back to the next congressional session starting in the new year). The first of these stories is presumably part of the bargaining strategy and doesn’t necessarily change our view that a thin trade deal can be achieved later in the year, but will likely still mean some economic disruption. The second weakens the UK hand in further negotiations but is not a surprise given that the US has typically been a tough partner for smaller countries to negotiate with. Both scenarios present some headwinds which could add to volatility.
A good overview of the current market situation from Brewin Dolphin. High levels of volatility continue in the markets and the impacts of the virus are still being felt globally.
Please continue to check back for our latest blog posts and updates.
Please see article below from AJ Bell Youinvest on the potential capital gains tax hike – received 23/07/2020.
How to beat the potential capital gains tax hike
The tax system could soon change to help the Government raise money to cover some of its Covid-19 support efforts
Thursday 23 Jul 2020 Author: Laura Suter
Chancellor Rishi Sunak has signalled he is looking to shake up how capital gains tax (CGT) is paid, which could leave taxpayers with a higher tax bill.
Sunak has asked the Office for Tax Simplification to look at how CGT is structured, whether the tax can be simplified and if more help can be given to individuals in the administration of the tax.
While he doesn’t explicitly say so, many people assume that the timing of the review indicates the Chancellor could be looking at changing the tax as one way to raise money in order to pay for the Government’s cost of the current Covid-19 pandemic.
The Government has spent a large amount of money on helping the country to stay afloat during the current crisis and everyone expects this year’s Autumn Statement to reveal how it plans to pay for this support. While additional Government borrowing is one solution, tax hikes may also be on the agenda.
The review will look at the differences between the CGT system and the income tax system, how private residence relief works and the reliefs and exemptions on offer.
PUBLIC OPINION
The move might not be entirely unpopular with the British public. Research from AJ Bell showed that two thirds of people think we have a responsibility to contribute towards the cost of the recent measures.
When questioned, the most popular tax to increase was either dividend taxes or CGT, with 37% of respondents thinking it was acceptable to raise those taxes. This was followed by a third of people who said income tax and 22% who said inheritance tax.
WHAT COULD CHANGE?
Changing tax rates: One area that may change is the rates charged on CGT (see below for current rates). There is a big difference between the rates charged for income tax and CGT.
An additional rate taxpayer, for example, would pay 45% tax on any income they make over their personal allowance, but only 20% on their investment gains. One thing the Government could do is bring these rates in line with each other.
Cutting allowances: In a similar vein to above, individuals have a tax-free rate for their income and for their capital gains – currently £12,500 before income tax kicks in and £12,300 for CGT.
These allowances could be brought together, so someone only has one lot of £12,500, for example, before they incur tax. This would bring lots more people into the bracket of having to pay CGT.
Scrapping main home relief: At the moment you pay no CGT on the gains you make on your main home – in part this is offset by the fact that you have to pay stamp duty tax when you buy a new home.
However, one suggestion has been that the Government could remove or limit this relief. This would mean lots of people who had made a gain on their property would face a large tax bill, but in turn could raise a lot of money for the Government. It would be an odd move to make just as the Government has put in other measures to try to get the housing market moving.
HOW CAN YOU BEAT THE HIKE?
If you’re worried about any rise in the tax rates or cuts to allowances, you could think about locking in gains now. Remember, anything in an ISA or SIPP is exempt from CGT, so you don’t need to worry about those gains. But outside of these tax wrappers your investments could face CGT.
You can choose to cash in gains up to your annual allowance this year, in order to lock in some gains and make use of that allowance. If your gains are higher than your allowance, you could transfer assets to your spouse so they can use their allowance.
Transfers to spouses are exempt from CGT, but if they then sell the assets they’ll face CGT on any profit between the price you bought the investment and the price at which they are selling. If you transfer assets to them, they can then cash in the gains and use their annual allowance to avoid a large tax bill.
For example, let’s assume Mrs Smith has investments that have a £25,000 gain on them, and she is a higher-rate taxpayer. If she sold those investments in one tax year, she’d use her £12,300 allowance but still pay tax at 20% on the remaining £12,700 gain – which would equal a £2,540 tax bill.
However, if she transferred the investments with the remaining £12,700 gain on them to her husband, who is a basic-rate taxpayer, he could use his £12,300 tax free allowance – leaving just £400 of gains to pay tax on. At his lower 10% CGT rate this would mean a tax bill of just £40 – saving £2,500.
Another option is cashing in the gain and rebuying the asset in your ISA, assuming you have some of your annual ISA allowance remaining. This is called ‘bed and ISA’ and means you can use your annual allowance, keep hold of the investment and future gains will be exempt from CGT.
HOW DOES CAPITAL GAINS TAX WORK?
You pay capital gains tax on any profit you make when you sell an asset that has risen in value.
Some assets are tax free, including your main home. Everyone gets a tax-free allowance each year, which is currently £12,300 per person.
Beyond this level any gains are taxed depending on your income tax rate, so basic-rate taxpayers pay 10% (or 18% on property) while higher and additional-rate payers pay 20% (or 28% on property).
If you give money to your spouse you don’t have to pay CGT, nor on assets including land, property or shares you gift to charity. If you make a loss on an asset you can offset that against any gains you make on other assets in order to reduce your tax bill – and you can carry forward losses into future years.
A useful article covering the potential changes to capital gains tax and a breakdown of how capital gains tax works. The Government has spent a large amount of money on helping the country during the Coronavirus Pandemic and it will be interesting to see how the Government plans to pay for this support and what changes will be made.
Please continue to check back for our latest blog posts and updates.
Please see article below from Close Brothers Asset Management received 17/07/2020.
Looking at the path to recovery
SUMMARY
•Covid-19 has already dented global growth in 2020 • Having fallen initially, equity markets have recovered as investors take a long term view • Sovereign bond yields remain at or near historic lows across most developed markets • The efficacy of health policy will be key in determining how long the pandemic lasts – the effects of the pandemic on the economy are likely to be long lasting • The global economy may be less interconnected in years to come, due to changing supply chains, a larger role for fiscal and health policy and geopolitical tensions • Changes already underway have been accelerated by the pandemic – investors must identify the winners and losers in the post-pandemic world
INTRODUCTION
In the first quarter of 2020, the spread of Covid-19 around the world precipitated an unprecedented health emergency, forcing countries worldwide to respond quickly with dramatic measures to limit the spread of the virus. Stock markets initially plunged, as investors reacted to this sudden new threat to the global economy, while bond yields reached new lows, reflecting investor caution and the expectation of central bank monetary stimulus. At one point, the price of a barrel of oil turned negative, as low demand and a supply glut exhausted North American storage capacity. The world had seemingly been turned on its head in a matter of weeks.
In time, markets have recovered much ground, comforted by both governments and central banks stepping in to ease the immediate impact of the pandemic on consumers and businesses. The MSCI World Index, having fallen over 30% in February and March, was less than 10% below the pre-pandemic level at the end of June. Given the backdrop of an immediate global recession, and an uncertain path to recovery in 2021, such strong performance is hard to reconcile. Within bond markets, sovereign yields remain anchored, with the yield on a 10Y US treasury still well below 1%, suggesting a more pessimistic view of growth.
While investors have learned to stomach the immediate economic implications of Covid-19, what lies ahead is still somewhat unclear. Nonetheless, even in a time of such uncertainty, there are some conclusions investors could draw with a degree of confidence, many of which have clear and important implications for businesses.
LASTING SIDE-EFFECTS
The disruption caused by the pandemic may be with us for some time. The pandemic is not yet over. While the initial surge of the pandemic is behind us here in the UK and restrictions are easing, in parts of the US, Russia, India, Latin America and Africa, the spread of the virus is still accelerating (see figure 1). What is more, there are some signs of a “second wave” of the virus in some countries that have eased restrictions, resulting in social distancing being reintroduced.
Epidemiologists and health professions in general know much more about Covid-19 than they did at the start of 2020, but much is still unknown. Research into the virus is focussed on three key areas which will determine how long the pandemic lasts.
1. VACCINE The first focus for research is to find an effective vaccine – until an effective vaccine is found, Covid-19 will remain a health risk. The global health community has already started a coordinated research effort, with a number of potential avenues being explored. There are also funding programmes and agreements in place designed to ensure that access to a vaccine is fair, so as to avoid poorer countries being deprived of important health resources. However, developing, testing and distributing a vaccine will take time. Unlike medication that is given to those who are ill, a vaccine is given to someone who is well. An effective vaccine also needs to protect a person for a reasonably long time, not just a few weeks. All of this means that vaccine testing takes longer than other kinds of medication. With these facts in mind, and despite all the resources being committed, it is unlikely that a vaccine will be available in 2020.
2. TREATMENT A second area of research is that into treatments for people already suffering with Covid-19 symptoms. These treatments either seek to limit the virus’ ability to attack the body, or to limit the complications caused by the body’s own response to the virus. Such therapies may limit the severity of the illness the virus causes, saving lives and reducing strain on health services. So far, only limited progress has been made in this research area, mostly in terms of repurposing existing drugs that have been found to have some positive impact on Covid-19 patients. This means that, for now at least, the disease caused by the virus remains a serious concern.
3. TRANSMISSION The third research area is concerned with the transmission of the virus. What factors determine how easily the virus is spread? Which social distancing measures are most important in order to limit contagion?
How do we know who has the virus? While our understanding of how the virus spreads is improving, research in the area remains nascent. For now, policy makers have limited access to data assessing the effectiveness of various social distancing measures, though over time this will improve. As a result of this, it is possible that governments will have to test different policy measures before they are able to establish which are most effective. On the virus detection front, scientists are making some progress towards quicker and more accurate tests for the virus, which may help policy makers control the spread.
Given that a vaccine is unlikely to be available in 2020, the limited progress made in finding a therapy, and the limited data available to policy makers when evaluating social distancing programmes, it seems likely that the economic disruption caused by the pandemic will be long-lasting.
DESYNCHRONISATION IS COMING
The global economy may become less coordinated as a result of thepandemic The prevailing trend of the global economy over the last two decades has been one of globalisation – increasingly sophisticated and interconnected supply chains have allowed businesses to source materials and labour worldwide, and just-in-time production technology has eliminated the requirement for businesses to hold a large inventory. As a result of this, the global economy also became increasingly synchronised – monetary stimulus in China would ripple across the globe, impacting copper prices in Chile and hotel rates in Cherbourg.
The pandemic may cause a partial desynchronisation in the global economy for a number of reasons. Firstly, the experience of the pandemic has revealed the importance of supply chains being not only efficient, but also resilient. For strategically important goods, this is likely to lead to a partial re-shoring of production, reducing the supply chain’s vulnerability to shocks along the line. For other goods, it seems possible that nations may also shift some off-shore production from distant manufacturing hubs to a neighbouring country with appropriate manufacturing capacity. While this does not signal the end of globalisation, we may see some fragmentation in global trade and a period of disruption while supply chains are re-orientated.
The second driver of desynchronisation is the greater importance of health and fiscal policies versus monetary policies. In the years since the financial crisis, monetary policy has been the dominant policy tool used to control the global economy, with governments in the world’s developed markets unenthusiastic, for the most part, about accommodative fiscal policy in the wake of a crisis. While monetary policy remains an important and powerful policy tool with a strong influence over the global economy, attitudes to fiscal policy have changed and government spending is likely to be higher in those economies that can afford it and those prepared to borrow further to fund it. While monetary policy has mostly washed through the global economy, especially that enacted by the US and China, the effect of fiscal policies may be more localised and heterogeneous, as the results will depend on the efficacy of the measures introduced, the scale of spending, and the sphere of focus (see figure 2 below).
Lastly, the stresses caused by the pandemic appear to have further stroked nationalist feeling in some of the world’s economies, exacerbating geopolitical tensions that were already simmering away. We see this especially in global relations with China, where tensions are rising on a number of fronts.
While we do not expect the age of globalisation to end altogether, it does seem possible that desynchronisation may cause greater dispersion in asset performance across geographical regions.
ACCELERATED CHANGE
The pandemic has accelerated a number of structural changes that were already in train. In the words of Vladimir Lenin, “There are decades where nothing happens; and there are weeks where decades happen.” For many of us, life has changed a lot since the beginning of the pandemic, in both large ways and small. These changes have knock-on implications for the economy and businesses. One such example of a trend accelerated by the pandemic is the wider adoption of working from home. The pandemic has forced many businesses to adjust working practices and put in place the necessary technology and procedures to allow employees to be as productive from home as they would be in the workplace. This makes remote working for some not only possible, but an attractive option. This is supportive for the industries that facilitate this approach to working. However, it is likely to cause disruption to other sectors of the economy – remote working is likely to weigh on the airline sector, especially those carriers more exposed to business travel, if companies do not adjust. Demand for housing may also change – space for a study may be more important than proximity to a railway line. For those sectors where remote working is not an option, the extra costs associated with providing a virus-safe working environment may shift the scales in favour of the wider adoption of automation.
While few of these trends are new, the pace of adoption appears to have been spurred by Covid-19. Businesses themselves may also be transformed for better or worse. New business practices may add costs for some companies, but may provide opportunities to increase efficiency for others. Indeed, some listed firms will emerge from the crisis slimmed down and more profitable than when they went in to lockdown.
POSITIONING PORTFOLIOS
Given what we know about the pandemic, what is the likely impact on asset prices? As we have discussed, we expect global growth to be much lower than usual this year, and this in turn will weigh on corporate earnings growth – with some companies already cutting dividend payments (earnings paid out to investors). Given the pace of research progress into a vaccine, treatments and limiting transmission, some of the effects of the pandemic will be long lasting, making it likely that the economic recovery takes longer.
While growth may be depressed near term, shares are long term investments and current prices should theoretically reflect the present value of all future earnings, not just those in the next twelve months. On this basis, it is the structural changes accelerated by the pandemic that will likely have a more meaningful impact on asset prices. Asset prices certainly reflect this in some areas, with the global technology index outpacing the broader global index, and currently sitting above pre-pandemic levels (see figure 3 below).
In this environment, we believe that active management will be even more important. Investors must consider which health and fiscal policies are likely to be more favourable, and as a result, which regions will experience better outcomes. We must also consider which industries are best positioned and which businesses are best adapting to the realities of the post-pandemic world.
Within the bond market, the new outlook for global growth makes it likely that interest rates will remain at new lows for longer, which is generally supportive for bonds. However, the marked increase in government bond issuance is a potential source of concern. While central banks have committed to bond buying programmes, this appetite may not be unlimited. With government bond yields so low, further monetary accommodation may be required in order to eke out further price performance from these richly priced assets. Nonetheless, given the scope for shocks to the economy, bonds play an important role within multi-asset portfolios.
Across shares and corporate bonds, our research focus remains on businesses with ample working capital, as it is these businesses which we believe will be able to survive and thrive once immediate emergency support measures are withdrawn. At some point, social distancing measures will be lifted and growth will recover. Our priority now is establishing the right price for assets that will survive the here and now and will be attractive to hold in the longer term.
CONCLUSION
With the initial turmoil of this unprecedented health and economic emergency behind us, we are focussing on the longer term implications of Covid-19. We continue to closely monitor the evolution of the health data in order to better gauge the likely duration of this period of weak growth, and to analyse individual securities so that we may identify those with the greatest near term resilience and long term prospects.
A good insight from Close Brothers Asset Management.
The disruption cause by COVID-19 could be with us for some time yet. Whilst the initial surge of the pandemic is behind us here in the UK and some restrictions are easing, in parts of the US, Russia, India, Latin American and Africa, the spread of the virus is still accelerating with some signs of a ‘second wave’ of the virus in some of the countries that have eased restrictions. What lies ahead still remains somewhat unclear.
Please keep checking back for regular updates and blog posts.
Please see article below from J.P.Morgan’s weekly market update – received 13/07/2020.
The US presidential election will take place on 3 November 2020. The result will have important implications for investors, as the combination of policies employed by the next administration could have a significant influence on whether the US stock market can continue the outperformance that it has recorded for much of the last decade. Our regularly updated election insights provide investors with all they need to know as the election story evolves.
US election insight – July 2020
The race for the White House is heating up. Joe Biden and the Democrats have seen a surge in the polls in recent weeks, as the US experiences a wave of Covid-19 cases and against a backdrop of widespread protest against racial inequality and social justice issues. The Democrats are also making strong headway in the battle for the Senate, increasing the odds of a “blue wave” in November. The next key event will be the selection of Joe Biden’s running mate – a decision that takes on more significance this year than in a normal election campaign.
What will be voted on in November?
The race for the White House is the main focus, but a president’s ability to achieve their policy goals is influenced by who controls Congress.
American voters will be asked to make three key decisions on 3 November. The main focus will clearly be on who wins the keys to the White House, but a president’s ability to achieve their policy goals is influenced by which parties control the two arms of Congress: the House of Representatives and the Senate. If Congress remains divided between the Democrats and the Republicans as it is today, the winner of November’s contest will rely heavily on unilateral action taken via executive orders and rulemakings through the federal government via the department and agencies that have significant power. Enacting larger policy proposals requires approval by Congress and the winner of the election will have a much tougher time enacting that part of their agenda. Exhibit 1 shows the numbers needed to win each race.
The electoral college
The presidential candidate that wins the most number of votes (or wins “the popular vote”) does not automatically become president. Instead, the US employs an electoral college system. Votes are tallied at a state level, and the winner in each state earns the “electoral votes” that belong to that state (with the number of electoral votes in each state determined by population size). A candidate needs to win at least 270 of the 538 electoral votes in order to win the presidency.
The Senate
US senators serve six-year terms, which means that roughly a third of the 100 Senate seats are up for grabs at each federal or mid-term election. Currently the Republicans control the Senate. There are 35 seats up for election this year – 23 currently held by Republicans and 12 currently held by Democrats. To win control of the Senate, the Democrats would need to keep all of their existing seats and flip three seats if they win the presidency, or four if they do not, as the vice president casts tie-breaking votes.
The House of Representatives
Each of the 435 seats in the House are up for election in November, with the winners serving a two-year term. Currently the Democrats control the House. For the Republicans to win back control, they would need to win 21 additional seats and hold on to two vacant seats that were previously held by Republicans.
Members of both the House and the Senate serve on a wide range of committees. The Senate has the authority to approve presidential nominations – such as Supreme Court justices and members of the Federal Reserve Board. Betting odds at the start of July put a Democratic sweep of the House and the Senate as the most likely by a significant margin.
Exhibit 1: Votes or seats in the Electoral College, the Senate and the House of Representatives
Source: 270 to Win, The Cook Political Report, J.P. Morgan Asset Management. *In 2016 Trump earned 306 pledged electors, Clinton 232. They lost, respectively, two and five votes to faithless electors in the official tally. **51 seats are needed for a simple majority if the dominant party in the Senate is not represented in the White House. If the president and majority party are the same, only 50 seats are needed for a majority because the vice president casts the tie-breaking vote. 2016 numbers include two independents that vote with the Democrats. Data as of 30 June 2020.
How might Covid-19 change the election timeline?
While Covid-19 has upended the usual schedule, election day itself is unlikely to shift given the need for Congress to approve any change.
The coronavirus outbreak has already had a significant impact on the primary season – the process by which Democratic and Republican presidential candidates are formally nominated. After state lockdowns began in earnest in mid-March, 16 states and one territory either postponed, cancelled or switched their primaries to vote-by-mail with extended deadlines. The Democratic National Convention, at which the Democratic candidate is officially nominated to represent the party in the presidential election, has been delayed by a month to 17-20 August, a week before the Republican National Convention.
While election day may well look very different to any other seen before in the US, the 3 November date is not likely to move. Presidential elections are set in federal law to take place on the Tuesday after the first Monday in November, and for this to be changed, approval from the Democrat-controlled House of Representatives would be required.
It appears that social distancing is highly likely to be required in some form and may threaten voter turnout, which is particularly important for the Democrats’ prospects given the distribution of the electoral college. Non-traditional voting methods have been rising in availability and popularity in recent years (see Exhibit 3), but Democratic proposals for further expansions in 2020 have so far been met with strong opposition by the Republicans.
Exhibit 3: States permitting different methods of alternative voting
Number of states
What are the investment implications?
Election years are on average characterised by lower returns and higher volatility, but market dynamics in 2020 will be dominated by the prevailing economic environment
Typically, returns are lower and volatility is higher in election years than in non-election years (see Exhibit 6), although these averages are significantly skewed by major recessions and market events in recent election years. Returns and volatility in 2020 will almost certainly be attributable to Covid-19, not the political campaigns quietly existing alongside it. While the election is still a few months away, there are three areas of focus that could materially impact investor sentiment over the summer.
1. Roadmap for the rebound Top priority for whoever leads the next US administration will be to manage the economy as it restarts in earnest in 2021. Government finances have been stretched by the vast fiscal packages approved so far and tough choices will need to be made about whether to push ahead with further stimulus, or to try to tighten the belt as the recovery gets underway. The Federal Reserve (the Fed) may come under increasing pressure to keep yields low, although if this pressure is so strong as to cause investors to question the Fed’s independence, there is a risk that longer-dated yields could be pushed higher.
2. US-China relations The US-China relationship is now back on a worrying path. The hit to both business confidence and investment intentions across the globe in 2019 highlighted the economic damage that was caused by the trade war. Actions from either country that ratchet up tensions further ahead of the November election are a clear catalyst for market volatility. While so far it has been a Republican administration in charge of the negotiations, further information from the Democrats about how they would propose to manage this relationship may also impact market sentiment.
3. Progressive policy proposals The most progressive policies moved out of the picture as the most progressive Democratic candidates exited the race. Yet it is still evident that Joe Biden’s vision for corporate America is clearly different to President Trump’s. Democratic proposals for the use of anti-trust legislation to clamp down on “Big Tech”, plans for corporate tax changes and how to shore up the healthcare system are all matters that warrant close attention.
The combination of policies employed by the next administration will be an important factor in determining whether the US stock market’s leadership over much of the past decade will continue. An environment of escalating trade tensions has favoured the higher-quality US stock market relative to other regions historically, although we recognise that an increase in regulatory pressure on the tech titans could pose risks to US market leadership given the high weights to technology and communication services sectors in US indices. We will be tracking developments closely as 3 November approaches.
Exhibit 6: S&P 500 price returns Percent, average return from 1932 – 2019
S&P 500 realised volatility Percent, 52-week standard deviation of price returns, 1932-2019
As the US is one of the largest most influential markets globally, what happens next from a political point of view is important to the global economy.
Please keep checking back for regular updates and blog posts.
Please see below an article written by Edward Park – Brooks Macdonald – received – 06/07/2020
Weekly Market Commentary | Chinese editorial brings optimism despite rising COVID-19 cases in the US
Equity sentiment remains torn between a highly accommodative backdrop and the rise in US new cases
While US new cases grow by the day, fatalities remain suppressed providing hope to risk assets
Chinese state media effectively endorse the strong year-to-date gains in Chinese markets
Equity sentiment remains torn between a highly accommodative backdrop and the rise in US new cases
New cases of COVID-19 in the United States continued to rise over the weekend although, with the Friday holiday, reporting may well be distorted even more than is usually the case at weekends. In terms of the hot spot states, Florida saw a gain of 5.3% and Arizona 3.7% as the growth showed little sign of slowing. The good news remains that fatalities are supressed, with average growth across the US of just 0.2% compared to case growth which increased by 1.7%. This remains key to markets, given the impact of fatalities on the economy versus health trade-off. Markets can be expected to continue to set their tone from this interplay.
While US new cases grow by the day, fatalities remain suppressed providing hope to risk assets
Overnight Chinese indices have seen large gains, as state media stated that a healthy stock bull market was more important than ever post-pandemic. This front-page editorial for the Securities Times suggests that Beijing will continue to act to support the equity market through regulation as well as fiscal and monetary policy. The editorial has supported risk appetite globally, with European indices opening to strong gains and US stock futures implying a solid start to the week. With risk assets currently more finely poised, given what is happening in the US, government and central bank support is of growing importance.
Chinese state media effectively endorse the strong year-to-date gains in Chinese markets
The comment by Chinese state media is viewed as a de facto sanctioning of the market rally in China. This has not always been the case, with the government historically using its powers to try to curb retail-fuelled gains, particularly where there was a concern over leverage. Chinese retail positioning has been gaining traction in recent weeks as the MSCI China edges closer to a 10% year-to-date gain. As the Chinese economy reopens, local investors have been looking past the US new case growth, with the Chinese technology sector being a particular beneficiary of inflows.
Please continue to check back for further blog content and updates.
Hot off the press, I’ve just come off a webinar update from Prudential notifying us of the following positive Unit Price Adjustments (UPAs):
Series E only
PruFund Growth + 2.58%
PruFund Risk Managed 4 + 3.00%
PruFund Risk Managed 5 + 2.56%
The underlying unsmoothed assets were tested against the smoothed prices, the corridors, at 10.56 this morning.
You might ask why we have different UPAs for the different versions of PruFund? For the following reasons:
Different asset mix
The starting position
Different smoothing limits
The last point, different smoothing limits, doesn’t apply to the three funds we use noted above. The monthly smoothing limits in use for the funds we use is 5%.
Please see this link for details on how ‘smoothing’ works:
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.
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.
Capital and income from it is at risk. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
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.
This piece is cut and pasted from an investment update from Legal & General Investment Management today (18/05/2020):
The role of politics in a potential second wave
Media and investor attention has been drawn to the experience of the so-called ‘early easers’ of lockdowns, and so far the news has been quite good. There have been some localised outbreaks, but no material evidence yet of full-force second waves of COVID-19 emerging in countries like Austria, Korea and Germany.
That said, those countries all had manageable caseloads when paring back their restrictions – unlike the US, where active cases per capita are running around five times higher than they were in the early-easing countries at the time they began to unlock. Some American states that are relaxing stay-at-home guidance run serious risks of a secondary outbreak, especially with no contact tracing in place.
Looking deeper into the US, we see further evidence that the country should not be treated as one when it comes to the virus’s spread. Hospitalisation rates, which acted as a good leading indicator in Italy, are coming down in New York and New Jersey. But in much of the rest of the country, they are both high and consistent, implying those states have not passed their COVID-19 peaks even as they start to unlock.
Interestingly, the level of mobility in each state – an indicator of how serious lockdown measures are – is highly correlated with Trump’s vote share in the 2016 election, with the most Republican states the least locked down. Conversely, lockdown levels and hospitalisation rates show no relationship whatsoever, so it is politics, not epidemiology, that’s dictating the US approach to the restrictions.
What does unlocking mean for markets? The initial reaction may be positive as it means economic activity returns, but we believe such optimism is overdone. Unlocking will be slow and individuals will be reluctant to return to their previous lifestyles any time soon. To that extent, ending restrictions not only poses a risk of a second virus wave, but a market risk, too, as investors are disappointed by the slow speed of economic recovery.
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.
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.
