This will be our final update for a few weeks. We aim to resume at the beginning of September unless something happens in the meantime. Most economies have moved from the initial phase of lockdown to second and third phases, which are a mix of restarting and adjusting to the new normal.
The economic data has been truly astonishing but not unexpected when you close most businesses. We have seen signs of a recovery, but we must remember this is coming from a low level and the next two or three months will be crucial.
Some things are becoming clearer – inflation is likely to be muted, interest rates will not rise any time soon and we can expect to continue to see central bank and government intervention. Longer term this debt must be repaid, and there will likely be tax rises, especially in the UK.
In one of my recent meetings we discussed the value of advice. Fidelity runs a non-advised platform, and during the period from mid-March to June, two thirds of those over 65 sold their equity positions. As we have seen in this crisis, exiting the market could have been a costly mistake. We do not know if markets will fall again, but this recovery was faster than anything seen previously.
We have spoken to over 90 fund managers this year to understand more about their funds and their activities. In a ‘normal’ year, we would likely speak to around 70 fund managers.
We have also spoken with economists and health experts, which involved more than 20 conference calls per week at the height of the crisis. This has given us a clearer perspective during a challenging time.
We have not provided opinions in this piece, rather just shared updates from various useful sources.
- The reporting of data differs by country. In the UK, the Office for National Statistics provides some of the most accurate reporting in world. Their data shows a massive reduction in the UK in infections and deaths from the peak. The UK data considers all areas including local communities, whereas many countries only refer to hospital admissions
- Some countries like China and Korea, as well as continental Europe, and the UK have responded better to second waves and keeping infections down. India, Brazil and South Africa are struggling to contain the first wave, and the US never really got a handle on theirs with continued spikes in infections
- Will the Oxford University team save the world? Their researchers have a track record on Zika, Ebola and MERS. The UK has already ordered 100 million doses of the vaccine. They have had the first tests back and are now expanding the trials. If everything goes well, this vaccine could be available by the end of the year.
- In a recent update from Fidelity, they explained that the FDA (Food and Drug Administration) in the US is working 24 hours a day so the ability to approve quicker is there
- This is the greatest global challenge since WWII but there has been so much support from Governments and Central Banks, especially in the race to develop a vaccine, and there is little doubt we will prevail. That said, weaker businesses have been propped up and they will likely fail, but larger companies will not be without casualties either
- Finally, regarding Brexit, they believe both parties want a deal which will ultimately arrive but may not be the best. However, the UK is a leader in areas like universities, accountancy, and actuarial services
- Why are banks and airlines challenged? With interest rates at near zero banks cannot get any margins on both deposits and loans. If you look at Lloyds, until interest rates rise, the new normal price might be 30p-35p per share, and not 60p-65p. With airlines, some have relied on business travel (first and business class), and older people (snowbirds!). These two groups are now more restricted, so the business model for some airlines must adapt to reflect a changing market
- The FTSE has not recovered as strongly as the likes of the S&P500 because it is full of old-world companies. In the past we created unproductive jobs, and these are now disappearing. Banks and energy firms have all done badly, despite new world businesses like Ocado and healthcare it has meant the FTSE’s ability to recover in the short term is limited. Over the next 2-3 years it may start to return to previous high levels
- For many years, the FTSE was the bell weather for the economy. This is no longer the case; it consists of companies outside the growth part of society. That might change as businesses re-identify themselves but the focus on the performance of the economy should not be the FTSE daily level.
- For investors, they should move away from companies where governments have or can intervene. The Government will control things like dividends which affects the outcomes for shareholders. Certain companies are aiming to repay furlough payments, and not take any further money as they try and detach themselves from Government interference
- COVID will become a scapegoat for ‘internal restructuring’, if companies were planning to cut jobs, they will be able to more easily, rather than having to phase it over a couple of years
- On Brexit, they have a slightly different view to BMO. They think the deadline will be missed but they believe the markets have priced this in. The UK only makes up 3% of global GDP behind the EU, US, and China so it will not a big hit if the deadline is missed
- There is evidence in the US that consumers are spending the extra money they have been receiving from the Government, but this will stop soon, so what happens when people have less money? It remains to be seen if any further stimulus will be provided
- In the UK there is a concern that the government may stop support too soon and all the support (furlough/grants etc) has been a waste of money. They believe you need to support sectors like retail, leisure, and food because these will be the hardest hit
- In the US, no president has won an election where there has been high unemployment. There is also evidence that older people are switching from Trump to Biden, in the key states Biden leads and Trump’s approval rating has fallen significantly. They do not believe he will win
- Medical news from Moderna where early stage trials have been positive, Oxford are in third stage trials in places like South Africa, Brazil and throughout South America. These will have binary outcomes, i.e. only good or only bad news
- Many risks exist coming into the second half of the year – trade tensions, Brexit, US election, vaccine, exit from lockdown – we are a long way from a full recovery
- Specifically, on Brexit, they think it is too early to say we will have a deal or not. A ‘No deal’ will affect our exports to the EU and hit the UK economy hard. The worst areas are likely to be mid and small cap companies and they are not confident on the UK economy at the moment. However, there are rumours of a skeleton deal by August
ClearBridge Investments – Anatomy of a Recession
- This is not like a normal bear market, both in terms of the sell off and the subsequent recovery in markets
- They have an index which uses 9 variables to outline when a recovery is coming. At the end of April this index showed a global recession, at the end of May it moved to improvement and now is in expansion
- The market reaches the bottom before the end of a recession. When their index shows green, it is on average 1 month before the end, whereas in the Global Financial Crisis this was 5 months
- The average return between the end of the recession and the next recession is 96%. They believe we are in a secular bull market and there is plenty of upside over the next 10 years
- Where there is a 50-day positive change as we have seen, the markets are up 100% of the time over the next 6 and 12 months
- In the US many investors are still holding cash, currently 18% of the total equity market, this is the highest level since 2012
- Guide to who will win the election – if the market rises from August then this is usually a sign that the incumbent President remains in the White House, if the market falls then it can mean the opposition wins
- Short term they expect markets to decline perhaps in late Summer / Quarter 4 but focus on the longer-term picture
- Remain supportive of growth stocks vs value; the biggest risk to growth is if there is a spike in inflation caused by a sudden and sharp uplift in oil prices, higher inflation would favour value
- Worries in the UK; May GDP was 1.8%, analysts were expecting 5% to 10% and means growth is a quarter smaller than a year ago. The OBR believes that unemployment could reach 4 million or around 11%, before the crisis the UK was running at 3.5%. It is estimated that £35 billion of support scheme grants will not be repaid. And watch out for changes to Capital Gains, they are coming
- There has been some progress on Brexit over the London clearing system, this could be a positive sign
- Much of the UK trade with the rest of the world is on WTO rules, we should not be afraid of this
- In the US, Biden should declare his running mate at the start of August, the person to watch is Tammy Duckworth who is a US army veteran
- Throughout time there have been periods of uncertainty, when we cannot see an end, but we have always come through them
- We know the data will be ugly in the short term and that it will take time to get back to normal
- Although there appears to be a surge in cases in the US the number of people being tested is significantly greater than in April, if the same number were tested in April then this would be a blip not a surge
- You cannot stop a virus, but viruses weaken, and we get better at handling them. Focus on the positive rather than the negative
- We will not shutdown economies fully again, so it will not be a W shape recovery
- The US markets are expecting an 80% decline in corporate profits, if the actual figure is 50% then markets are still undervalued. They believe the decline will be around 25% which means even today markets are cheap with significant upside potential
- They remain bullish about markets because not only do they think they are cheap but also the amount of money that has been pumped into the system
- Viruses do go away even without a vaccine however Oxford’s team are in stages 2 and 3 of testing and there may be a vaccine in September or October. Scientists are paid to be cautious, so they must feel confident they have figured it out
Coronavirus vaccine tracker: How close are we to a vaccine – click here
COVID-19 trial progresses, as ‘cautious optimism’ grows for RNA vaccine – click here
Why you don’t need to worry about the bubonic plague – click here
The Anatomy of a Recession: What to Look for and Where We’re Headed (presentation) – click here
How Tech Giants Make Their Billions – click here
Asset Class Risk and Return Over the Last Decade (2010-2019) – click here
Mapped: Each Region’s Median Age Since 1950 – click here
A third of Brits actually enjoyed the lockdown, report shows – click here
What’s a virus, anyway? – click here
Our happiness is more dependent on money today than in the 70s and 80s – click here
Looking at the economic and environmental effects of the pandemic, pressing questions emerge – click here
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.