There’s been some relief from Covid’ and economic news this week with a celebrity court case, the UK’s government decision to remove Huawei’s 5G kit, Britain accusing Russia of vaccine hack and election meddling and more familiar US/China spats but it’s not quite business as usual. There’s still reporting of unemployment, the risk of a second Covid’ wave and the eyewatering levels of related government borrowing. It’s pretty dismal reading and neglects to acknowledge the more positive news. Perhaps an appropriate time to take stock.
We’re a couple of weeks into the third quarter of the year. Global stock markets have recovered reasonable value for the year to date and more than the UK which is still down almost 18% not helped by dividend cuts (I’m coming to the positive…). However, conventional and index linked bonds (sorry for the jargon) have had positive returns in the second quarter and year to date. Holding these bonds as part of a well diversified portfolio has helped protect value this year.
As I’ve mentioned previously, the recovery has been V shaped to date albeit the V has now flattened somewhat. Mobility data confirms we’re all on the move and retails sales have picked up (again, this is good) but the reality is a huge fall in economic output (as expected during the lockdown period). Some output may be permanently lost and the extent to which it will be replaced by new or growing sectors remains unclear. There is however a consensus view that economic output will spike with significant growth next year, settling down in 2022. We should be reassured by this.
Along with many other economies, the UK has benefited from furlough schemes and (again) it’s likely unemployment will increase further when schemes end. While this isn’t great it’s countered by the consensus view of increasing economic output which could absorb this unemployment.
In terms of where we go now, China offers some insight as to the shape of the recovery from here. From a low point in February (China’s lockdown was far earlier and more strictly imposed) recovery has continued albeit consumer spending and corporate investment lagged until more recently. A recent survey of private businesses showed a sharp upturn suggesting the recovery is broadening out. This is against a background of companies shedding jobs and clusters of new Covid’ infections which are being addressed by local lockdown. Not too dissimilar to the UK right now which again is encouraging.
There have been clear winners such as digital and technology companies countered by more cyclical companies (which are dependent on consumer spending) having had a significant downturn as a consequence of lock down. Financial markets have largely absorbed this news without drama, again supporting the “future earnings” valuation basis I’ve mentioned previously. Things are beginning to settle down.
Politically there seems to be a lack of appetite for (if not a strong wish to avoid) a return to blanket lockdown which again helps financial markets. No one knows what the new normal will look like but it seems reasonable to expect structural changes (and consumer spending habits) to continue and possibly accelerate. In conclusion the news flow is not yielding anything unexpected as we transition to the new normal.
Have a good weekend
Regards
Kenny