Before writing this, I read my first weekly update from “way back” on 19th March, when the UK had just gone into lockdown and was struck by how long ago it all now seems. Policy makers were in crisis mode as both infection and mortality rates increased, fearing health services would be unable to cope. And, by taking action to avoid a medical crisis, the cost of the resulting economic crisis began to unfold. It was an anxious time for everyone, particularly investors. Weekly updates were intended to be helpful at a time when reassurance was most needed as news flow (and the stock market value) changed alarmingly on a day to day basis.
Whilst our daily lives are far from normal, restrictions are slowly eased and we now seem to be emerging from crisis mode. The infection rate has reduced and is arguably contained, travel restrictions are easing and the vaccine race seems to have been stepped up. The Fed’ and other central banks have done their job to provide liquidity (avoiding a financial crisis) and UK and US stock markets have had a positive month.
Both news flow and financial markets have steadied somewhat as restrictions begin to ease.
This week the “B” word returned to the news as Brexit negotiations appear to be at loggerheads and the US/China trade spat, again raises its head. Reading about Brexit is almost a familiar comfort. Almost. While mentioning the EU, it’s worthy of note and positive news that the Franco German €500bn EU recovery fund is making progress, albeit requiring further detail.
One of the positive market trends we observe is that the virus crisis is accelerating digital transformation. During lockdown we increased our online shopping, changed working and socialising interactions with Zoom, routinely stream music, film and TV entertainment and read more online publications. Tesco are now making a million deliveries a day compared to “just 600,000” a month ago, all ordered online. Travel, banks and energy companies have all suffered, although even airline and cruise operators have seen a share price rally on the news of easing travel restrictions (future earnings, mentioned last week, benefiting share price again).
This leads to my final point regarding stock markets and the valuation basis, which inevitable have a bearing on portfolio values. The majority of portfolios have recovered around half of the value from the low point. There is an investment debate around the importance of “fundamentals” in respect of stock market or share valuations. Fundamentals include company earnings (it’s profits), assets, cash reserves and other indicators, fundamental to the attractiveness, or not, of a company for investment.
Fundamentals always matter, but at the moment, it’s not short-term fundamentals that matter (which are shot to pieces) but the medium and longer term. I indicated last week that current stock market valuations support around two thirds of the world economy returning to pre virus levels of production by the end of 2021 (after just 3 months to get here), which increasingly feels like a reasonable forecast.
One forecast which outstrips this is the weather, which looks exceptional for the next week. On that note, best wishes for the weekend!
Regards
Kenny