When our leaders are backwards at coming forwards, it’s hardly any wonder there is a lack of clarity in how things will look in the future. Like President Trump who has insisted on taking an untested malaria drug and was quoted recently saying about his latest Covid 19 tests: “And I tested very positively in another sense, this morning. I tested positively toward negative, right? So I tested perfectly this morning. Meaning I tested negative…. But that’s a way of saying it: positively toward the negative.”
On our side of the pond our leader didn’t cover himself in glory either, with Boris’s ‘stay alert speech’ being one of the most watched speeches in broadcast history (27.5m viewers), where he announced: “We now need to stress that anyone who can’t work from home, for instance those in construction or manufacturing, should be actively encouraged to go to work. And we want it to be safe for you to get to work. So, you should avoid public transport if at all possible – because we must and will maintain social distancing, and capacity will therefore be limited. So, work from home if you can, but you should go to work if you can’t work from home”.
It all adds up
There are multiple compounding factors which also underpin the pandemic, with oil prices tumbling due to lack of demand and the US – China trade war resurfacing when some global solidarity is needed. The latter for me is the most worrying as it has sat upon portfolio returns for the last few years stifling returns and any momentum. Donald Trump has suggested that he will review the Phase One trade deal agreed with China earlier this year to check whether China is delivering on its obligations to buy an additional $200bn of American goods over the next 2 years. With US policy towards China likely to be a key theme of the US Presidential election, given Joe Biden has already accused Donald Trump of being ‘soft on China’, you can imagine this doesn’t sit well with the slightly unhinged president.
The broader economy remains very fragile so any resurgence in tariff risks could lead to even more bouts of volatility. China’s economic activity has indicated a reduction to around -3% which would indicate recession, but China’s figures aren’t always reliable, and are expected to report a figure of around 3% growth which is much lower than its 6% normal. China set themselves a target 10 years ago to double their GDP per head by 2020, they will achieve this by hook or by crook, so absolutely have to ‘get the economy going’ and will implement huge fiscal stimulus.
The US, UK and European GDP numbers also look rather worrying with falls predicted of anything between 10-20%, but again governments and central banks are and will be doing everything in their power to keep the economy going, the policy response being to make sure businesses can continue to operate and survive throughout this crisis, so these companies will be able to help the recovery come through when we are on the ‘other side’ of this pandemic. Interest rates have also been cut down to zero in the US and down to 0.25% in the UK.
Leading by example?
This rather worrying behaviour and guidance from our leaders is only instilling further uncertainty in investors and markets alike.
Investment markets are forward looking and are looking forwards to see where the bottom of this latest crisis will ultimately be. At present the expectation is a ‘V’ shape recovery or ‘V+’ shape recovery as a best case scenario. The worry is that there will be a further slide, and this will create another ‘V’ resulting in a ‘W’ shape recovery and prolonging the effect of the pandemic. The data coming out recently for company earnings have been alarming for investors, with the UK Equity income sector expecting a 30% drop in FTSE 100 dividends for 2020 and 50% for 2021. All very bad news, however, April turned out to be an extraordinary month in its own way, with Wall Street having its best single month performance since 1987 and all major markets recovering strongly from the lows of March. It is absolutely not normal to have daily swings of 2-3%. With that said, after a couple of months enduring such swings, we are getting used to them.
So as is evident, there are many conflicting factors and news stories to be able to give a definitive answer on when and what the recovery will look like. The general consensus is that we expect a sharp recovery to come through in markets when the recovery, whether ‘V’ or ‘W’ shaped, eventually happens and this is likely to be in the coming 6-12 months. With all of our clients our advice is to remain invested and to add to your investments where you can take advantage of the relatively cheap assets. As economies open again, there will certainly be an element of pent up demand, so a recovery, when it comes, could be relatively sharp. Governments will bring forward any spending they can, interest rates will remain at zero for the foreseeable future, and banks will be encouraged to keep credit lines open for companies.
We can see the easing of restrictions and the lockdown ending at some point, although it is difficult to predict exactly when. There remains a conflict at the heart of government, between the Treasury, who want to get the economy up and running as soon as possible, and the Department of Health, whose agenda is to save lives. Any loosening is likely to be accompanied by a considerable degree of caution. We have ably demonstrated that we can work efficiently remotely and anything that will take pressure off the crowded commuter networks around London will be welcomed.
Some good news
There is good news everywhere if you look past all the negative headlines. Major Tom is to become Sir Major Tom, and Microsoft CEO Satya Nadella noted: “we have achieved two years of digital transformation in just two months”. We are encouraged to see firms such as Microsoft, Apple and Paypal continue to produce resilient returns throughout this downturn and adapt to the current crisis. Comparisons and concerns have been drawn with the Tech Bubble of the late 90s, when the concentration of the S&P 500 was at similar levels but there is one key difference – earnings growth. Almost the entirety of the S&P 500 2019 Q4 earnings growth was driven by the FAAMG. EPS (earnings per share) for these stocks grew a whopping 16% year-over-year (Goldman Sachs Global Investment Research). Apple announced this week that its sales in China were $9.5bn, down less than $1bn from last year. Normally, a fall of 10% in sales is not a good thing; in this case the results are not as bad as one could have expected.
So, what to do with your money? Our investment managers will be holding cash and looking to phase any cash in at opportune times, and this is exactly what we would encourage our clients and investors who hold cash in ‘interest paying accounts’ to do – to look to add funds into the market over a period of time and try to phase the cash in on the reported weaknesses. You can discuss with your IFA how best to achieve this.
Please as always stay safe, and get in touch should you want to discuss any aspect of your finances.