13 July 2020
Investors remain buoyant despite a stark rise in US cases
One rumour that did the rounds in the early days of the COVID-19 pandemic was that the virus couldn’t survive in direct sunlight. It is perhaps ironic, then, that the Sunshine State has just broken the US record for the highest single-day total of new coronavirus cases by any state since the start of the pandemic, with more than 15,000 new infections on Sunday.
The rise in cases in Florida, as well as Texas, California, and Arizona, placed some downward pressure on markets last week, with the S&P 500 relatively flat throughout the week. There was increased movement into less risky assets, such as sovereign debt, leading to high demand for US Treasuries. The price of gold, a ‘safe haven’ asset, hit a nine-year high last week, reaching $1,800 per troy ounce for the first time since 2011.
However, investor sentiment remains buoyant, with hopes that the rate of increase in the US, while alarming, might stay lower than it was when the virus first struck, due to behavioural changes and lockdown-type restrictions in some states.
With the creation of a vaccine or treatment appearing increasingly likely, Lew Sanders of Sanders Capital, Co-manager of the St. James’s Place Global Value fund, believes that such treatments could mean that much of this year’s economic damage could be repaired in 2021 (if introduced in a timely manner), with government interventions having played a crucial supporting role in the interim. Sanders added that active fund management allows for opportunities in times of uncertainty:
“Anxiety is the source of opportunity. It’s what actually spawns high expected returns, and settings like this produce quite a lot of it.”
Optimism in China
Hopes of recovery were more prevalent in China, where equities recorded large gains throughout the week, before falling on Friday. The Shanghai Composite rose 10% between Monday and Wednesday, and the renminbi also strengthened against the dollar following data suggesting that its economy is recovering.
Sentiment was mixed in Europe, where on Tuesday the European Commission warned that the economic fallout from COVID-19 will be worse than feared. Lowering its growth forecasts for the EU this year, it now expects the bloc’s GDP to shrink by 8.3% this year, worse than its previous estimate of 7.4%. It also expects a smaller recovery in 2021.
Ken Hsia from Ninety One, manager of the St. James’s Place Continental European fund, argues:
“Lower growth forecasts due to COVID-19 should not surprise”.
He added that positive data is beginning to emerge from Europe as lockdowns ease and government support packages kick in. COVID-19 case numbers, discussions around the EU recovery fund, and upcoming quarterly announcements from companies, will all affect European markets in the coming weeks, he says.
“Overall we believe that Europe’s actions against COVID-19 are reasonable compared to other parts of the world. This should mean that further risk is mitigated, and COVID-19 risk should be behind us before long.”
High street challenges
The high street may have reopened for business, but retail life is far from ‘back to normal’, with a 60% fall in household spending on clothing and footwear (See ‘In the Picture’). The closure of stores back in March resulted in many consumers doing almost all of their shopping online, from the comfort (and safety) of their homes – a habit that is likely to stick, at least until the threat of the virus has passed.
While online shopping was popular before the pandemic, the virus may accelerate the decline of the high street. Small independent businesses that don’t have an online presence are likely to suffer most from this shift in behaviour, but no company is immune – Boots and John Lewis were among more high street names to announce store closures last week, as more businesses adapt their models to fit ‘the new normal’.
Meanwhile, affordable clothing Boohoo Group came under scrutiny last week. Founded in 2006, the online group successfully targets the youth market, reaching 12-month sales of over £1 billion in 2019.
But a Sunday Times investigation alleges that its supply chain included UK factories where workers earned less than the minimum wage, and where social distancing requirements were not adhered to. Cramped working conditions in the Leicester factories were linked to a spike in COVID-19 cases and a local lockdown of the city. Its share price dropped on the news (but recovered later in the week), while major retailers suspended the sale of its items.
The fallout demonstrates what can happen when companies fall foul of environmental, social and governance (ESG) concerns. Whether Boohoo Group bounces back, or whether it faces longer-term problems, the story should serve as a cautionary tale for companies and investors alike.
Chancellor announces new stimulus to support jobs
On Wednesday, UK Chancellor Rishi Sunak unveiled a further stimulus package designed to support jobs and boost confidence. Markets responded well to the news, although the aforementioned job losses at Boots and John Lewis the next day pointed to the dangers ahead. The coming months will force politicians, businesses and investors to start thinking about how the UK will deal with higher levels of public debt.
Paul Johnson, Director at the Institute for Fiscal Studies, commented:
“The time to pay for all this will come. But not this year and not next. Our capacity to do so will depend above all on how the economy recovers. Let’s hold in the back of our minds that a reckoning, in the form of higher taxes, will come eventually.”