WeeklyWatch – ‘Drink responsibly’ takes on new meaning as UK pubs reopen
06 July 2020
Good news buoys markets
Investors are scanning the news for signs of a coronavirus vaccine as keenly as homeworkers are looking out for the arrival of their next takeaway. It was little surprise, then, that markets enjoyed another boost last week after positive COVID-19 vaccine trial results made the headlines. They rose again on better-than-expected US jobs figures on Thursday, which showed a drop in unemployment from 13.3% to 11.1%. These bits of good news contributed to a broad rally last week, which saw the S&P 500 end the quarter up 20%.
The rally came in contrast to a surge in coronavirus cases in the US, with daily infections topping 50,000 for the first time on Wednesday. Investors are very aware of the risks this presents, and one sign of their growing caution came from the lower-rated end of the US bond market, where investors sold junk bonds at the fastest rate since the start of the pandemic.
The upcoming US election also hit the headlines – specifically, Biden’s growing popularity, with a Citigroup poll of 140 fund managers revealing that 62% believe the challenger will win in November. This will begin to impact markets as investors decide how his proposals on tax, the minimum wage and climate will affect US business – for better or for worse. One common view is that his proposed corporate tax increase will sting, but an expected easing of trade tensions with China might act as a benign backdrop.
UK banking on support
Back on home soil, and 30-year UK government bond yields dropped to a level below Japan’s (which are famously low). This is striking in the context of the UK borrowing heavily to fund its response to the coronavirus – which, on its own, might be expected to push yields higher.
The principal cause is a large bond-buying programme from the Bank of England. Central bank actions such as these have helped to reassure markets since they were implemented in March. Capital Economics doesn’t expect to see another panic in financial markets, even if the number of coronavirus cases in the US continues to rise, as central banks have signalled that they’ll step in again if necessary.
Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, agrees:
“One thing which we know we can rely on for the foreseeable future is central bank asset purchases.”
Mixed messages from China
Two pieces of data last week gave encouraging signs to investors that economic recovery in China is underway – positive manufacturing data was followed by a survey of the county’s services sector that pointed towards higher consumer spending. The country’s blue-chip CSI300 benchmark index ended the week at its highest level in five years.
However, the political situation in Hong Kong continues to deteriorate. Last week Beijing imposed its sweeping national security law over Asia’s financial hub, in a major blow to its autonomy. The move attracted international criticism, but a muted response in the markets suggests that investors have absorbed the news.
Martin Hennecke, Asia Investment Director at St. James’s Place, notes:
“Last week has actually been the busiest for IPOs in Hong Kong so far this year, which suggests that the political developments are not a deterrent for companies to list here.”
Corporate headwinds as Airbus cuts jobs
The “shape” of the global recovery has been the subject of debate for weeks – and whether it takes the form of a “V”, a “U”, or an “L”, we are likely to find out very soon. We can expect some clues in the form of Q2 company earnings results. One answer at the more pessimistic end of the spectrum arrived early last week from Airbus, which announced a cut of 15,000 jobs in the face of low demand for its jets. Even more alarming was the CEO’s stark prediction that air traffic won’t return to pre-COVID levels before 2023.
Earlier this year, Airbus had been expected to increase production of its popular single-aisle aircraft, the A320, and enjoy an uplift in servicing revenues for other jets, notes Gavin Marriott of Schroders, managers of the St. James’s Place Managed Growth fund. But that changed fast after the coronavirus hit. “The issues faced by airlines in the face of the material deceleration caused by COVID-19 has severely undermined this thesis”, he adds, noting that the fund exited its position in Airbus earlier this year.
Airbus’s fate is evidence for those arguing a V-shaped recovery is unlikely. But it’s wise not to over-analyse. Aviation is famously prone to ‘external shocks’: incidents like natural disasters or terrorism, which stop people buying tickets for flights. Airline executives who’ve weathered a few shocks are fond of a cynical industry joke: “What’s the best way to make a million dollars? Buy an airline for a billion.”
The phrase ‘drink responsibly’ came with fresh connotations at the weekend, as UK pubs and bars reopened for business. Social distancing measures were in place, with customers being told to stay a metre plus apart, order drinks through their phones and not ‘overdo it’.
This controlled reopening of the hospitality sector after three months of closure epitomises the tightrope the government is treading – a busy pub will stimulate the economy but could also risk a second wave. Yet, if not enough people feel comfortable enough to return to their local watering hole, businesses (and jobs) will be lost.
Today, Chancellor Rishi Sunak is expected to lay out his plans for how the UK economy can start to recover from the pandemic. Experts are predicting a raft of measures to help support businesses, protect jobs and encourage household spending. A cut to VAT to temporarily boost the economy could be on the cards, to encourage households to spend the savings they have accumulated over the lockdown period. Former Chancellor Sajid Javid has advocated this measure – but with a VAT cut of only 3% costing the Treasury an estimated £21 billion, consumer spending needs to be in full force for this to be effective.
It has also been suggested that Mr Sunak will raise the stamp duty exemption threshold to £500,000, in order to boost the housing market. The Chancellor may also try to ease conditions for businesses by reducing the level of employer National Insurance contributions, or relaxing the conditions for repaying the Coronavirus Business Interruption Loan Scheme. This could prevent a surge in job losses – which are forecast if no extra stimulus is provided – and give businesses extra cash to invest.
It’s likely that the Chancellor will use the Autumn Budget to address government borrowing, which is set to pass £300 billion.1 Ultra-low interest rates mean that this is sustainable for the moment, but higher taxes or spending cuts are on the horizon as the government takes steps to reduce the deficit.
1 Office for Budget Responsibility, May 2020
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
In the picture
The market capitalisation of electric car maker Tesla overtook that of Toyota last week, with its shares hitting a new all-time high of $1,135, giving the company a valuation of roughly $206.5 billion, compared with Toyota’s $202 billion.
Co-founded by controversial entrepreneur Elon Musk, Tesla makes fewer vehicles and is less profitable than its Japanese counterpart, but is viewed as a leader in the future of transport.
The Last Word
“We must now realise the promise of America by trusting God, unifying our vision and building our future. I am running for president of the United States! #2020VISION”
– Kanye West, rapper and entrepreneur, who announced his presidential bid via Twitter at the weekend.
The information contained is correct as at the date of the article.
BlueBay and Schroders are fund managers for St. James’s Place.
The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.
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