A sense of optimism – news from the frontline – 5th June 2020

A lot can happen in two weeks; the UK recorded the sunniest spring since records began in 1929, and the driest May for 124 years, the previous record was in 1948. On Monday, we were given some more freedom, and a road map to when things may gradually return to some normality.

Tonight (Friday), we will be celebrating my wife’s 50th Birthday with a BBQ with some close friends (socially distancing of course!), even two weeks ago we could not have imagined this happening. Although a few months ago we had grander plans!!!

The markets seem to have found a level and are bouncing around this. As businesses slowly open, we should see further green shoots of recovery. It is not all plain sailing however, as we have seen various announcements of job cuts, and we can expect this to increase. I wonder whether many of these were coming but events have accelerated some of the changes within businesses.

Speaking to friends, they feel a sense of optimism in the air. It will not be an easy journey, but we will eventually return to something that looked like our lives, and importantly we will learn to cope and manage this virus as we do with others, and future ones.

We have moved these updates to fortnightly as the flow of information has slowed. Should there be any major changes then we will increase the frequency.

Before I dive into thoughts from others, and links to various articles I want to share this one from the BBC Website called “Coronavirus: How scared should we be?” click here.

It also has a link to a tool developed by University College London which expands on the differences in risk, click here to view.

Let us know if you have any questions or comments.

First Trust (Economic Update)

As always, a sprinkle of optimism and realism from First Trust:

  • The data on the virus is improving; in New York City it has moved from over 1,000 deaths a day to around 100
  • They feel the virus was around a lot longer than was first thought and therefore it is naturally coming to an end. Speaking to doctors, they think treatments have improved as they avoid ventilators and look at other ways to manage it
  • Without being callous, they believe closing economies (lockdown) will be considered a massive mistake, but countries were forced to follow others, and accused of dithering when they were slow to react. In shutting down economies no consideration was made on the impact of closing them and people’s long-term health. The deaths long term from this exercise could be far greater than those from the virus – in the US there has been a spike in suicides, depression, and fear – with the last 2 having massive long-term health implications. Economically, children and grandchildren are being left with massive debt mountains which will stifle future economic growth
  • No-one seems to understand the full extent of the damage. Consider farming, if you grow a tomato, it needs to be planted, land to grow in, fertiliser, a farmer, a picker, a truck, grocers, and consumers. If you shut down the economy it takes time to rebuild the entire process, you cannot easily switch it back on
  • Good news is that there will be a rebound as things start to open. People crave interaction and we will return to normal, but it will take time
  • The US stock market is pricing in optimism for the future – previously, it was pricing in an 80% decline in corporate profits, this is likely to be around 25%. There is already a rotation towards those companies that have been left behind and this is likely to give a broader market recovery. There is also an explosion of money supply that we have never seen before and interest rates are low. All of this indicates the markets are undervalued
  • They remain bullish and see growth over the next two quarters with very few risks. They take an optimistic view that many people will want to get back to normal, they might be scared but that should not last forever. However, it will take time to rebuild economies and confidence
  • They believe the polls are wrong and that Trump will win the election, and even if he does not, they think the Republicans will hold the Senate
  • Finally, they feel that optimism is the way to look at this – we know the people at risk because the data tells us, and therefore we know those we need to protect. For the vast majority, the risk is minimal, some will fight this, but it is always about going back to the data

BMO (Economic Update)

Thoughts:

  • We are winning the war with the virus, but it comes at enormous economic costs; they think the drop in GDP could be as high as -30% in Q2 for the UK
  • The markets are pricing in optimism based on the recovery in China
  • The barriers to recovery in the UK include testing and tracing, PPE, a second wave and a vaccine. However, they still believe in a V shape recovery in the UK
  • In the US, they think Biden will win, and there will be a Democratic clean sweep. It will mean greater infrastructure spending but might not be good for the likes of Google and Facebook
  • They believe markets will recover so looking towards the end of next year for new highs. In the short term they think markets are too complacent and we could see a correction in June of between 5% and 10%
  • Three main sticking points over Brexit are fishing, level playing field (a set of common rules and standards that are used primarily to prevent businesses in one country undercutting their rivals in other countries, in areas such as workers’ rights and environmental protections) and Northern Ireland – the EU think the UK will blink, they think we will go for a no deal
  • They believe interest rates will be lower for longer and this favours growth companies and those that are capital and labour light. But there is a risk around legislation for companies like Google and Facebook where they are forced to break up the businesses due to their size

Jupiter (Economic and Merlin Teams)

China vs USA:

  • New ‘cold war’ is between the US and China; it is not now a question of sharing between the two it is about choosing which one you back
  • With what is happening in Hong Kong, there is a new danger this could escalate into a major conflict especially between China and Taiwan. There is a growing school of thought the world is overdue a global conflict
  • China wants to move away from the dollar as the global currency
  • China is offering a real alternative in terms of 5G to the West

Other thoughts:

  • In terms of the virus the news is getting better, with Spain reporting no COVID19 fatalities for the first time
  • Battle ground is now moving to politics, in the UK it is also more about the economy than the NHS – as we exit lockdown it will become more divisive and political. The feeling is that 90% of adults can assess risk themselves but the government is running the economy for the 10% who cannot behave responsibly – expect this to get messy in the coming weeks
  • There are green shoots – rate of new signatories (unemployment) in the US has been coming down since 20 April. Also 3.7 million are no longer claiming benefit. There is also a slow recovery in US consumer habits
  • PMI manufacturing data is slowly improving; US in May went from 36 to 39, UK from 32.6 to 40.7 and Eurozone 33 to 39.4. Italy went from 31 to 45!
  • Worth mentioning the Lufthansa rescue package with the German Government collapsed after Ryanair opposed it – there could be beneficiaries if they collapse and one of those would be Ryanair!
  • Their final point is the social consequences. In the last ten years if you were asset rich you did very well if you had no assets you will have been left behind. The last ten years have created tensions between the rich and poor. To demonstrate this in the US, look at the Chapwood Index which shows real inflation as high as 10%. For this reason, you see Trump and Corbyn as populist leaders. 2020 is more complicated, like the global financial crisis there will be consequences but at this stage it is not clear what these will be, but it could be that the tension between rich and poor just gets worse

JP Morgan (Guide to Markets)

Thoughts on real estate:

  • Data based on their vast portfolio of assets in the US – multifamily occupancy rent payments average 96%, in May it was 91%, Industrial units the figures were 90% and 75%, Office 90% and 80%. The big fall was retail which averaged 90% and in May was 29%
  • This is similar across the European and UK portfolios
  • In the US over the last week, foot traffic in malls was up 50% of the loss during the shutdown; consumer confidence is important, and they are watching for any spikes in infection following the protests and opening from lockdown
  • They have seen a lot of property REITS repricing from the lowest point, and ultimately, they think by 2022 we will be doing things similarly to that of 2019

Columbia Threadneedle (Economic Team)

Thoughts:

  • Measuring a U shape recovery, but will vary from country to country; US 57%, UK 52% chance, Eurozone 41%, and Japan 28%
  • They believe COVID-19 will not totally go away, even with a vaccine. They expect a second wave, and although there will be further setbacks to the recovery it will not be as harsh, and the focus will be on hot spots. As time goes on, governments will be better prepared with testing, equipment, oxygen systems etc. If there is a lull between the first and second wave this will enable a quicker build-up of supplies
  • They do not expect interest rates to rise for several years, and they feel that different parts of the market will recover at different rates. They feel that those businesses with higher leverage are at greatest risk and may reach the other side of the recovery

Fidelity (Economic Team)

Thoughts:

  • There is ongoing healing within the markets and there is a sense of optimism especially as lockdown restrictions are lifted
  • They are concerned that valuations might be stretched, that markets are ignoring the growing tensions between and US and China and the degree of uncertainty that remains. Therefore, they believe in adopting a degree of caution
  • Although they think there could be a rally in junk stocks (cheap and battered) they think this will be short lived especially as we enter a period where returns and income are harder to come by

Investec (Economic Team)

Thoughts:

  • Believe in a lopsided V shape recovery, as more things open, we will start to see a resumption in economic activity
  • Much will be driven by consumer confidence. In the UK, people have been saving and it remains to be seen whether people spend or keep these savings
  • Further signs of recovery shown in rising PMI data (but still in retraction territory), car travel in the UK is up to about 50% of Pre-COVID levels, and in Germany restaurant reservations are at about 80% of Pre-COVID levels
  • Certain retail sectors have done well for example discounters, DIY, fitness, food etc. However, very few will make a profit because of what they have had to put in place to deliver on increased orders
  • We have seen retailers going into administration but many like Debenhams, Laura Ashley and Oasis were already struggling before this event
  • Retailers are facing challenges as to how they open, and they expect a phased re-opening to take advantage of the furlough scheme.
  • They also expect heavy discounts from clothing retailers as they try and clear spring and summer stocks. They disagree that retail will change forever, the change is in the method of delivery and customer experience. They do expect market consolidation, and strategic partnerships

Schroders (Global Transformation Conference)

Thoughts:

  • Economies starting to stabilise, and data is improving. Using tools like mobility data where you can see the recovery coming through
  • Believe slower growth, lower productivity and ageing populations will mean interest rates will remain low for many years
  • Increased levels of debt to cover areas like healthcare means that at some point governments will be forced to do something to reduce the debt or stabilise it. The options are austerity, taxes, or financial repression – keeping interest rates low (financial repression) is likely to be the preferred option
  • There is a concern about the rise in populism – those most impacted by COVID19 tend to be on the lower income scale, not only within sectors that they work but also technology disruption. Governments may print money as a way out of this, but this is an area of growing concern
  • They do not believe in a healthcare bubble; healthcare innovation is transformatory. For example, a vaccine can take anything from 6 to 9 months to develop for trials, innovation has reduced this to just 4 weeks. Areas of interest include advanced therapies, med tech, healthcare services, digital healthcare, and wellbeing
  • Zoom recently announced data that was better than the market expected. It is worth over $60 billion which is greater than the entire market cap of the global airline industry
  • The biggest risk to global mega cap tech names is not the valuations but regulation which could come in to break them up

Vulcan Value Partners

Interesting thoughts on the impact of COVID 19 over the next 5 years:

  • Permanent impact – physical retails, traditional media, consumer brands and cash payments
  • Neutral impact – aerospace, travel, autos/EVs, real estate, manufacturing, energy, and financial services
  • Positive impact – ecommerce, digital advertising, digital payments, 5G, internet of things, cloud computing and AI
  • Expect inflation, higher interest rates and increased taxes over the next five years

In the short term they are negative about the outlook. They think the recovery will be slow with second and third waves. The next year or so will be challenging but 2022 onwards, looks good.

When Vulcan were asked whether Amazon was a value stock, they stated value can be growth stocks, and Amazon, when markets fell in March, traded as a value stock. They are value investors and in March picked up companies like Skyworks (which is one of three companies which dominate the production of critical components in telecommunication infrastructure), and Microsoft.

Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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