WeeklyWatch – COVID-19 serves up more market twists and turns
16 June 2020
The average “job life expectancy” for a financial trader is a mere five years – perhaps little surprise given the rollercoaster-style nature of trading on the market. But where the usual twists and turns are stressful, traders must have been clutching the safety harness over the last few weeks, with several ups and downs throwing the numbers off-track.
A sudden market rise came hot on the heels of the lockdown-led crash, due to leading governments unleashing a fiscal bombardment – plus an encouraging US payrolls report. But markets slid again last week, in response the Chair of the US Federal Reserve admitting that the Fed doesn’t expect a full-blown economic recovery any time soon. Over the COVID-19 period, US stocks dropped 34% between 19th February and 23rd March, then rose 40% by 4th June. Now they are sliding again…
The US in recession?
Economic numbers have only served to add to the twists and turns. Last week, the Organisation for Economic Co-operation and Development warned that the world was experiencing its worst peacetime slump for 100 years. Meanwhile, the US downturn caused by the pandemic was officially labelled a recession by the country’s National Bureau of Economic Research, thus ending more than a decade of economic expansion – the longest in US history. Not to be left out, UK data showed that GDP contracted by a stunning 20% in April.
With numbers like these, one thing is at least certain: “We’re not thinking about raising rates,” confirmed Jerome Powell, Fed Chair, last week. “We’re not even thinking about thinking about raising rates.” Indeed, 15 of the rate-setting committee’s 17 officials said they expect to hold rates close to zero through 2022.
A second wave looms
Another concern is whether there’s a second wave on the horizon: last week Beijing returned to partial lockdown, and new coronavirus case numbers rose in Texas and Florida, as did hospital admissions in California. The S&P 500 index fell back below 3,000 points, ending a record run of 50 consecutive days of gains. The FTSE 100 came within an inch of falling through 6,000 points again (and actually did early this week). Carnival and Rolls Royce both suffered as travel and transportation woes continued.
The UK, meanwhile, was served gilts carrying negative yields; a rise in job losses; new forecasts of falling house prices; a dramatic scaling back of businesses’ investment plans (as per an IoD business tracker); a threat from BA that it would sue the government over quarantine measures; and a warning from the outgoing Chair of the Confederation of British Industry that the cash reserves companies had put aside for Brexit disruption had been spent on COVID-19.
Capital Economics commented: “The Bank of England has much more work to do. It will probably start by announcing £100 billion more quantitative easing (QE) at the meeting on Thursday 18th June.”
Despite the prevalence of lockdown in the world news, other corporate developments still matter. Unilever, the 90-year-old Anglo-Dutch company, completed its extended U-turn by deciding to incorporate only in the UK after all – undoubtedly a relief for London, but investors were unmoved. Tesla became the most valuable car company by market capitalisation last week, overtaking Toyota – an astonishing feat, if the price is justified.
As globalisation retreats, the signs are multiple: the race for a vaccine increasingly resembles an arms race between nations. Last week, the EU took the surprise step of complaining that Beijing has been spreading disinformation on coronavirus around the world. Meanwhile, as US company Zoom blocked a video meeting marking the anniversary of the Tiananmen Square protests of 1989, speculation mounted over the implications for US businesses of a US Department of Commerce expansion of sanctions (announced in May) on Huawei; the Chinese tech giant will struggle to access the US semiconductors it needs to make waves abroad with 5G.
“Building back better”
While traders agonise over the most immediate market fallout of such scrimmages, long-term investors are more focused on the deeper changes that these strange times may presage for the post-lockdown global economy. One emerging beneficiary is the green agenda, not least as work commuting and leisure travel fall.
Last year, for example, China had 170 million migrant workers – rural residents who move to towns or cities for work – whereas now there are just (!) 120 million, according to the National Bureau of Statistics. If government fiscal responses to COVID-19 are anything to go by, it may well be that – like younger consumers (see In the Picture) – they are willing to countenance radical green measures.
Kirsteen Morrison of Impax, Manager of the St. James’s Place Sustainable & Responsible Equity fund, commented:
“We saw governments in the global financial crisis respond with QE and low interest rates. This time around they’ve sought to secure jobs and put a continuity plan in place. Lessons have been learned from the last crisis on how to minimise the impact. But what we see more broadly is that now it’s shining a light on difficult to tackle issues like climate change and cyber risk. We think the support coming out of this is around a green recovery – a ‘build back better’. And the reason we’re hopeful is that it’s actually a way to create jobs.”
With rife speculation about how the UK government might recover the costs of their mounting pandemic bill (currently standing at £300 billion, according to the Office for Budget Responsibility), this week we look at one of the possible routes.
In addition to possible tax changes, the State Pension has also reappeared on the radar; specifically, the triple lock system. This system ensures the State Pension grows by either: a minimum of 2.5%, the rate of inflation, or average earnings growth – whichever is highest. In the last two years, wages growth has driven increases, and new analysis from Willis Towers Watson has warned that a V-shaped recovery could see pensions rise by as much as 21.3% over a two-year period.
This would prove a huge cost to the state, and ultimately the taxpayer. The figure is based on a forecast from the Office for Budget Responsibility that average earnings could fall by 7.3% in 2020 and rise by 18.3% in 2021. This scenario could be exacerbated as furloughed employees, whose earnings have been cut by 20%, revert to their original pay once the Coronavirus Job Retention Scheme comes to an end. In these circumstances, triple-locked pensions would rise by 2.5% when wages fell and by 18.3% when they rose again.
The Bank of England has predicted a less dramatic fall and rise in average earnings and, of course, there is disagreement over the likelihood of such a strong economic recovery. However, the prospect of big swings in wages growth will only fuel debate over whether the government will modify the triple lock legislation to cut costs and check the increase in the State Pension relative to earnings.
Claire Trott, Head of Pensions Strategy at St. James’s Place, commented:
“Pensions are often seen as easy pickings for the government to save money, but they shouldn’t be. These are people’s lives, not just an arbitrary number, and I feel that targeting pensioners specifically is unfair. It’s clear that, on the other side of this crisis, there may be difficult decisions to be made in relation to a lot of issues, such as tax relief on pension contributions, but now isn’t the time to be throwing these ideas around.”
In the picture
Copious statistics are reported daily since the pandemic – measuring everything from new cases to the impact on global economies. While some statistics, though worrying, won’t come as a shock, a recent survey has revealed a surprising effect of the global lockdown: one in five Brits are reducing their intake of meat and dairy (Vegan Society, April 2020).
Indeed, COVID-19 might fundamentally reshape how we consume our food, by fast-tracking the recent trend for eating less animal produce – there were just 150,000 vegans in the UK in 2014, soaring to 600,000 in 2018. And, in a study published in April this year, Finder concluded that 12 million Brits will be meat-free by the end of 2020 (chart source here). The benefits for listed vegan food companies (and those with a major vegan product offerings) are obvious, and many have already reported a positive effect on their share prices.
The Last Word
“I’m tired. I’m tired of the pain I’m feeling now and I’m tired of the pain I feel every time another black person is killed for no reason. I’m here today to ask you to make it stop. Stop the pain. Stop us from being tired.”
– Philonise Floyd, testifying last week to Congress’s House Judiciary Committee, the same week as the funeral of his brother, George Floyd.
Impax is a fund manager for St. James’s Place.
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