Please find below our Investment Market Update as at 9th October 2020.
Blue Sky Investment Market Update
The conductor is at it again!
Donald Trump not only wanted to show everyone that the virus wasn’t going to stop him from reinforcing his superhero status, he also wanted to show the Democrats and the US public that he was in charge by pulling the rug on the stimulus package. Well at least that is what he said in one of his tweets, and like a conductor with his baton, the orchestra responded – but in this case it was the investment markets. They suddenly went into reverse only to recover the day after when a later tweet from Trump suggested that a stimulus may be a possibility.
In our opinion, a stimulus package will be delivered in the US but sadly, it’s a political football at the moment; a view seemingly shared by the equity market as US stocks rose to a 5-week high.
Not as bad as feared
Goldman Sachs’ economics team, this week stated that they were upbeat on the US and its economic outlook and that the damage from the pandemic has been much less severe than initially feared. Their comment was “despite a recent increase in long-term unemployment, the rapid recovery of labour demand and the faster pace of labour reallocation should help most workers avoid long unemployment spells seen in prior recessions”. This reminds us that this recession has not been caused by an economic meltdown, overheating in the stock market or misguided central bank policy, it’s been caused by a health crisis.
Bloomberg reported that commercial bankruptcy filings are below the pre-pandemic level, business closures have proved temporary and unemployment has fallen sharply. All this bodes well for medium-term recovery prospects, say Goldman Sachs. A vaccine, combined with further fiscal support next year, is expected to limit long-term damage and keep the economy on track for a recovery that could be “much more rapid than usual”.
Markets are more relaxed about a Biden victory
The US election is less than a month away, yet the anticipated volatility has yet to manifest itself. We are pretty sure it will materialise, but interestingly, as Biden strengthens his lead in the polls, it appears as though the markets are more relaxed. It was thought that equity markets would favour Trump and not Biden due, in part, to the latter wanting to hike taxes.
What the markets don’t want to see is uncertainty as they prefer to know what they are dealing with.
Better news in Europe
At a time when dividends have been slashed by many companies, it was welcome news this week when JPMorgan reported that the dividend outlook for European banks is improving. They stated that the risk-reward for lenders’ stocks is now more balanced as strong capital progression limits the risk of share dilution and boosts the probability of pay-outs.
Disappointing figures on the UK’s economic growth
We are only talking about August here, but the UK economy (according to the Office of National Statistics, ONS) grew by less than expected. UK GDP increased by 2.1% from July, but fell short of the 4.6% consensus forecast from economists. One bright spot was the food and beverage sector, where activity grew by 69.7% due to the easing of lockdown restrictions and of course the government’s“eat out to help out” subsidised meals scheme. The accommodation industry also grew by 76% as staycations have become the norm.
“Now is not the time for Chicken Licken”
Andy Haldane, the Chief Economist for the Bank of England, said this in a speech recently to busines leaders, referring to the folk tale in which a chicken spreading a false fear that the sky was falling in, ends up as a fox’s dinner.
Figures from the ONS showed that the economy contracted by 19.8% in the second quarter,compared with the previous 3 months – slightly better than the first estimate of 20.4%. Mr Haldane was suggesting that the prospects for economic recovery would be endangered if people started ‘catastrophising’ by looking at the record drop rather than focusing on the bounce back since then. “Averting an economic anxiety attack calls for a balanced and flexible approach to the words and actions of businesses and policymakers. Encouraging news about the present needs not be drowned out by fears for the future”.
He did go on to acknowledge that the resurgence of Covid-19 cases was likely to slow the economic recovery, but said unemployment was expected to rise to a lower peak than the Central Bank’s 7.5% estimate, especially with the government’s new Job Support Scheme.
Property prices understandably rise
A gauge of UK house price growth surged to the highest in almost two decades. The Royal Institution of Chartered Surveyors measure of price movements over the past 3 months, climbed to the highest since 2002 in September of this year. New listings, enquiries and agreed sales all posted gains. Of course, the Stamp Duty stimulus has been a great catalyst.
However, there are headwinds as unemployment is likely to rise and lenders restrict mortgages to certain parts of the market. In response, Boris Johnson has suggested that there will be more generous home loans for millions of first-time buyers.
We thought you deserved some well needed optimism, as the shorter days draw in and once again the news flow has descended into a vortex of negativity.
I’m feeling particularly euphoric as my team, Everton, are currently top of the Premier League… not something I’ve been able to say for many, many years!
Have a lovely weekend.
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.