WeeklyWatch – With a V-shaped recovery looking unlikely, our hopes are now ‘swoosh’-shaped
19 May 2020
Much as Samuel Taylor Coleridge’s The Rime of the Ancient Mariner described the experience of sailing into ‘the doldrums’, or ‘equatorial calms’ in which different trade winds meet, often leaving ships unable to make progress, the global economy is in the doldrums right now. And the disagreement over when it will pick up is an economic tailwind – an increasing number of commentators, however, believe a V-shaped recovery is now unlikely.
“A slow path out of economic lockdown has seen ongoing downward revisions to growth forecasts, as it becomes increasingly apparent that measures pertaining to social distancing will continue to be disruptive for the foreseeable future,” said Mark Dowding of Bluebay Asset Management, co-manager of the St. James’s Place Strategic Income fund.
According to Brookings Institution and Pantheon Macroeconomics, we could be looking at a so-called ‘swoosh’ recovery – halfway between a V-shaped and U-shaped recovery. But it is the broader issue that’s the most notable disagreement; between the economic data and the stock market. The S&P 500’s current pricing suggests the likelihood of recovery within three months is above 80%, whereas the data says it’s close to 20%. How is such a divergence even possible?
Last week’s data showed that US prices are suffering from disinflation, freight activity is deteriorating, and private sector employment fell around 22% between mid-February and mid-April. And while the rate of decline has slowed, consumer sentiment still continues to worsen.
Is the US determined to decouple with China?
Amid a cocktail of data, forecasts and valuation concerns, the S&P slipped last week but still performed well relative to other global indices thanks to two local factors: the level of Fed support, and the index’s high concentration of technology stocks. This relative success could also mean investment opportunities elsewhere that are being missed.
“Almost all the value I currently see is in the emerging markets – relative to the US market, emerging world equity has never been cheaper,” said Jeremy Grantham of GMO, which co-manages the St. James’s Place Balanced Managed fund. “Besides, emerging markets now represent around 60% of global GDP and are typically growing twice as fast as developed markets.”
Since the latter end of 2018, tariffs on trade between the US and China have risen significantly, meaning that if the growth is in China, the US appears increasingly ready to forego some of the associated benefits of a close economic relationship.
The current pandemic seems to have reinforced America’s determination to decouple, as the president told US media on Thursday when he said, “we could cut off the whole relationship.” Poll results show that he may have plenty of support; according to Pew Research Center and Eurasia Group, there is a significant rise in US scepticism towards China and in Chinese scepticism towards the US since 2018.
While the Chinese economy is now showing some signs of recovery, figures for jobs, retail sales and export orders show some signs to be concerned; the CSI 300 also slipped last week. It isn’t all bad news, however – industrial production rose at double the rate economists expected. This raises a new question: can China now generate enough domestic demand?
“Things aren’t totally back to normal but, anecdotally, we are seeing some positive signs – a lot of people who used to take public transport have been out buying cars because they don’t want to risk exposure to the virus,” said Alistair Thompson of FSSA Investment Managers, manager of the St. James’s Place Asia Pacific fund. “Online deliveries have been another area of growth. Domestically, consumer staples companies like supermarkets and brewers tend to be doing well – we own China Resources Beer, the largest beer manufacturer with 40,000 employees. The big question is the demand side, with three quarters of the world in lockdown, significant levels of unemployment, and the risk of bankruptcies.”
In Europe, the EURO STOXX 50 and FTSE 100 both finished down for the trading period. UK GDP data showed that the economy contracted by 1.6% in the first quarter of the year but shrunk 5.8% in March alone. Whatever approaches governments around Europe took in response to the virus, the societal and economic trade-offs mean that difficult decisions lie ahead.
“I’m not totally convinced that the policy response has struck quite the right balance between the costs and the benefits of saving each life, but it is probably impossible because everyone’s view is different,” said GMO’s Grantham. “We are interrupting the education of our children; unemployment is off the chart and the failure rate among new businesses will be almost 100%. We have no idea what it will mean to have hundreds of thousands of businesses failing to pay the rent and losing their staff – just failing.”
With the unprecedented effect on lives and lifestyles of the pandemic crisis, The Wisdom Council has conducted new research into the feelings and reactions of investors.1
For baby boomers, the concern is about their near-term personal financial position as they continue to nurse losses on their portfolios. No doubt this also reflects the feelings of over half of investors, regardless of generation, that they don’t have a financial plan that can cope with the situation.
Confidence in the UK government’s response has also fallen since March, while a huge 70% of investors said they will consider individual company’s behaviour during the pandemic in their future investment decisions. How did they treat employees, or contribute to the wider social effort? Millennials in particular felt strongly about this respect, according to the research.
Reflecting some greater optimism about markets, almost half (42%) of investors are actually planning to invest more, with nearly two thirds of those wanting to do so in the next two or three months. It was clear, however, that many plan to drip-feed their money in – a sensible choice given the potential for further volatility.
1 The Wisdom Council – The Wise Society, Pulse May 2020; survey of 343 investors across ages, gender and investable wealth
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In the picture
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The Last Word
“I may very honestly say it pains me. On the one hand I make an effort on a daily basis to have a better relationship with Russia. But when you see on the other hand that there is hard evidence that Russian powers are behaving in that way, then of course it’s an area of tension…that remains inside me. That is unpleasant.”
– Angela Merkel describes her reaction to discovering that Russia had been behind the 2015 Bundestag hack
BlueBay, GMO and FSSA are fund managers for St. James’s Place.
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