It’s the end of another week (they seem to fly by faster than ever at the moment) and both sunny skies and an easing of lockdown measures seem good reasons for optimism.
Having taken an afternoon off to do some much needed ‘life-admin’ last Friday, I found myself without time to write a bulletin, so thought I would provide a more thorough appraisal of what is happening in investment markets this week and last by way of a catch up.
MARKETS ENJOY THE SUNSHINE, BUT BIG TROUBLE IS BREWING IN LITTLE CHINA…
Over the course of the past two weeks, it feels as if the new normal of enforced idleness, paired with less stringent lockdown rules and summer weather, is leading to an improvement in the mood of the British public. The same could be said for investors, whose portfolios also enjoyed some time in the sunshine.
Stock markets have continued upwards on news that a viable coronavirus vaccine may become available before the start of the next cold season. Markets were also encouraged by a surprise announcement by Germany and France that they supported the issuance joint European bonds; to the tune of a staggering half a trillion €-Euros. This could provide a significant boost to the European Union’s post-COVID-19 recovery.
Economic news flow later in the week also cheered-up economists, who have recently been expecting the worst. As a result, data that is only ‘really quite poor’ rather than outright ‘devastating’ is being greeted more warmly than we would have thought possible, given that the numbers are still overwhelmingly signalling an impending recession. This, combined with oil prices stabilising at levels above $30 per barrel does appear to indicate the tide may be turning, after so many weeks of economic doom and gloom. That is, even if some of the harbingers of doom are only somewhat less gloomy.
The positive stock market movements of the past two weeks suggest they have all but anticipated this turning already and it seems unlikely we will see them rising much higher for the time being. It is however undeniably positive that the loosening of lockdown restrictions across Europe has led to an already notable rise in levels of economic activity, but without – thus far – a rebound in the rate of infections. Quite the contrary, many formerly strongly affected areas are not registering any new cases. Given the rate of infections is still growing in countries blessed with permanently warmer climes, like India and Brazil, we cannot be sure whether COVID-19 is following the seasonal pattern of influenza, but for the moment it would appear that the coronavirus’ is in decline. Combine this with the prospect of a vaccine before the winter and we might just be looking at a better near-term outlook than we could recently have dreamt of.
However, we are certainly not out of the woods yet and the real impact of Coronavirus on the UK and world economies will take longer to become apparent and play out. The ability of businesses to bounce back from a government enforced hibernation will be crucial. Clearly there are significant support measures being made available, but for some businesses in those sectors most hurt by lockdown, it may not be enough. There is the question of how many of those furloughed will actually have jobs to go back to if the businesses that employ them cannot pull through. And of those businesses that do emerge from lockdown, but in a much-reduced state of health, how many redundancies may lie ahead? Clearly we will have to take a ‘wait and see’ mentality as it is far too early to start forecasting such things with any degree of accuracy.
Furthermore Coronavirus has done nothing to improve relations between the world’s two largest economies; USA and China. As per usual, Donald Trump has shown his typical ‘fire first and ask questions later’ approach to diplomacy, launching various public tirades against China. Relations aren’t about to get any better it seems. China has shown determination to align Hong Kong’s legal status much more closely with mainland China, which will give the Chinese authorities far-reaching powers to crack down on the freedom-defending people of Hong Kong. This is an abhorrence for many Hong Kong residents who have protested long and hard to try to prevent this from happening, seeking support for their cause from western nations. Sadly, an effective annexation of Hong Kong and continued deterioration of US-China relations will make it exceptionally difficult for the previously agreed phase-one trade agreement to be honoured. This has the potential to be damaging and destabilising for world economies – China in particular – and may result in some repositioning of portfolios to move to underweight Far Eastern equity positions.
Overall however, despite plenty of dark clouds, a sunny climate of recovering markets and (so far) less than expected economic decline seems to be fuelling cautious optimism. Whilst this is definitely a good thing for all of us as investors, our thoughts remain with our many business-owner clients who are still facing significant challenges over the weeks and months ahead as we continue to emerge from this crisis. If we can help in any way, please just let us know.
