The UK stock market is trading slightly higher than at the start of the month. There’s been continued volatility but thankfully not the dramatic swings in value witnessed in recent months. After a sharp initial recovery, the pace has eased. There’s a pause as markets observes how the transition back to work versus the threat of further infection waves plays out with a somewhat familiar division of opinion. The “ayes” fear the economic risk of prolonged shut down while the “nays” fear the health risk as the greater priority.
We’ve never experienced a health or economic situation like this and many of the arguments for both sides are based on recent experience rather than long established facts.
While recent experience suggests an increased risk of infection when lockdown is eased and that regional outbreaks may occur, we’ve also seen these can be managed effectively on a regional basis. On 10th June Beijing’s 56 day Covid-free run ended. Immediate tracking, testing and exclusion zones were initiated effectively and on 18th June the situation was declared under control, albeit by China rather than independently. However, there have been many other instances which have been similarly and effectively dealt with elsewhere.
It seems inevitable that there will be more outbreaks as people re-engage with family, friends and colleagues as they return to work. It’s a risk that collectively we can all manage while restarting the economy. Negating the risk completely has an economic cost which the UK government narrative suggests is too high. Broadscale reopening therefore seems both possible and likely.
Children returning to school full time is a very positive step towards normality and will help boost public confidence. This will provide childcare for many people and remove the home-schooling burden placed on those parents working from home. Both will aid economic recovery.
Other headlines reported that the Bank of England met expectations (last week) with further support which barely prompted reaction from financial markets. There were also early, welcome signs of a Brexit compromise and some US sabre rattling around trade negotiations with both China and the EU prompting some market reaction. This is perhaps more about US nationalism and jobs as the election approaches along with increasing unemployment.
Recent updates have made reference to current market values being underpinned by expected future earnings. Investment discussion this week has had a consistent theme around quarterly economic data (for Q2, this year’s second quarter), specifically company earnings (profits) which will be reported soon and are expected to be poor. However, the focus is around the guidance issued by companies rather than the numbers. This suggests acceptance of poor numbers and more interest in company forecasting.
It’s often said that bad news sells better than good news but it does not help public confidence. Confidence is particularly important right now. We need confidence to return our kids to school as we return to work and we need to be confident in booking a restaurant table when we’re able to. Confidence helps both household and business spending and that helps recovery. I was therefore heartened by the gastro pub which was overwhelmed by table bookings when it announced it’s planned reopening. I’ll be even more heartened when I am able to make that particular micro contribution to economic recovery myself!
It appears that while some are very keen to return to lifestyle habits others remain wary. I was interested in Peter Duncan’s comments last week about the significant bearing images shown on 6pm and 10pm news has on public behaviour. Perhaps we should welcome a return to commuter rail delays and queues in the high street being reported(!). As I look out at heavy rain clouds after the hottest day of the year, I’m reminded how quickly things can change.
Despite the weather (in Scotland), best wishes for the weekend.
Regards
Kenny