WeeklyWatch – Europe reaches its rescue deal
28 July 2020
Confidence grows in Europe
It might have taken four days (enough for a budding hiker to have walked from Brussels to Amsterdam), but last week, Europe’s leaders finally agreed on a €750 billion recovery fund, providing a welcome boost to the continent.
It also buoyed investor spirits – and, as the markets grew more confident that the deal would be signed, the euro strengthened against the dollar. European stocks also rose on the news – Germany’s DAX stock index even made a brief appearance in positive territory for the year, before slipping back later in the week as global stocks fell on news of fresh US-China tensions (more on that later!).
French President Emmanuel Macron hailed the deal as “the most important moment in the life of our Europe since the creation of the euro”. Indeed, it might have seemed unthinkable before the pandemic, as Mark Dowding of BlueBay, Co-manager of the Strategic Income fund at St. James’s Place, notes. But it demonstrates how Europe’s leaders have risen to the challenge of COVID-19, he says, and shows that “the European project is, in fact, a community of common values with a common destiny.”
Not everyone is convinced about the deal’s long-term significance, however. Rob Jukes, Chief Investment Officer at Rowan Dartington, argues that the agreement is a “fudge” and a “missed opportunity” to sort out some of the long-term problems in the eurozone. Not enough of the deal consists of grants (which don’t have to be repaid), while it falls short of the step towards true fiscal union that it could have become, he adds.
UK on the rebound?
So how should investors be thinking about Europe? Jukes says: “Because Europe is home to lots of exporters, it is well placed to benefit from a global recovery in the short term”. He adds that the continent has also dealt quite well with COVID-19, and is more insulated from the political issues in the US and UK that make those markets look a little riskier. Speaking about the recovery fund’s impact, Jukes adds: “There is definitely a short-term win here for Europe.”
Some recent data support the idea that there is cause for optimism: companies across the euro area have recovered relatively quickly so far in the second half of the year, according to data from IHS Markit on Friday.
The corresponding data for the UK showed that activity is rebounding, even though it’s hard to tell what shape the recovery is taking. On Friday, data showed that UK retail spending is now back to pre-virus levels. However, Capital Economics warns that the increase is disproportionately due to online spending and the fact that consumers are saving elsewhere: “We think it will take until 2022 for GDP to recapture its pre-virus level.”
Headwinds across world markets
Despite the air of positivity in Brussels, headwinds also provided plenty of challenges for world markets last week. Increased tension between the world’s largest economies saw the US order China to close its consulate in Houston, Texas, amid claims of intellectual property theft. Beijing retaliated by ordering the US to shut down its own consulate in Chengdu, China.
The news sent global stocks downwards on Friday, driving the price on five-year US Treasury bonds to new lows, and prompting gold to reach $1,900 per troy ounce – another recent high. Meanwhile, the weekly number of Americans applying for unemployment benefits crept up on Thursday to 1.4 million – the first increase in four months.
Similarly alarming was news about COVID-19 in the US. According to Pantheon Macroeconomics, even though the seven-day rolling average number of new coronavirus cases has fallen in 25 US states, new case numbers are rising increasingly quickly in some other states, and a spike in California last week raised some concerns.
Cases also jumped in Spain, particularly in the Catalonia region, prompting the UK to reverse its ‘travel corridor’ ruling for the country, therefore imposing 14-day quarantines on anyone arriving from Spain.
Microsoft, and other Big Tech players like Amazon, Facebook and Alphabet, are proving that some companies are thriving amidst the challenges posed by COVID-19. enjoying a stellar quarter.
Microsoft reported its quarterly results last week, surpassing Wall Street expectations. However, a slowdown in the growth of its cloud-computing arm did weigh on its share price as the week continued. Jim Henderson of Aristotle, Manager of the St. James’s Place North American fund (which holds Microsoft, as well as other tech winners such as Adobe and PayPal), commented:
“Microsoft is certainly benefitting from the fact that the world is working from home, and that our children are … playing a lot of Xbox. So, the absolute numbers that they were able to achieve in the quarter were quite impressive.”
The surging share prices of tech giants mean they now account for roughly a quarter of the total market capitalisation of the S&P500 Index. This said, US tech stocks dipped on Friday, perhaps in response to fears about their increasingly large role in the market.
But fears of tech stocks being overvalued are misplaced if investors continue to focus on companies’ long-term strengths, says Henderson. He notes:
“Have technology businesses got ahead of themselves in terms of their share prices? We don’t think so, in the case of the companies that we own, because we’re looking at intrinsic business values over longer periods of time.”
“’Cause you are gold (gold)
I’m glad that you’re bound to return”
– Gold by Spandau Ballet, 1983
The defining legacy of the Eighties might be its music, but in the years to come, the decade could also be characterised as the ‘Gold’ age for inheritance.
According to a new report by the Institute for Fiscal Studies (IFS), the median inheritance for those born in the 80s is predicted to be around £136,000.1 That’s more than twice the amount adults born in the 60s will receive on average, and significantly more than children of the 70s.2 “And you could leave me standing so tall”, indeed!
The think tank suggests that the transfer of wealth between generations will go on to determine how well-off people become, and this is likely “to have important implications for social (im)mobility within younger generations,” said David Sturrock, Senior Research Economist at the IFS.
The report has practical implications for the tax-efficiency of inheritance money that is gifted and received in the years to come. The government is under pressure to introduce taxation reforms that address the deficit, which has ballooned since the start of the coronavirus crisis.
A review of Inheritance Tax (IHT) has been underway since 2018, and could be an area where reforms are introduced to reduce relief (as opposed to increasing it).3 With receipts reaching record levels of £5.4 billion last year4, IHT is a particularly lucrative tax for the government and may be a first port of call when trying to balance the books.
Under current rules, assets of the deceased are exempt from paying any Capital Gains Tax (CGT). However, a review of CGT was announced earlier this month, which means there’s a possibility that the tax may change on death. The introduction of a so-called ‘wealth tax’ to further reduce the deficit and reduce inequality in the UK could have additional implications for the transfer of wealth between parents and their children in the coming decades.
The Autumn Budget may be when we find out more about the extent of the government’s taxation reforms. Now could be a good time to review making lifetime gifts before the tax rules are potentially simplified into something less generous.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1,2 Institute for Fiscal Studies, July 2020
3 Office of Tax Simplification: Inheritance Tax Review, November 2018
4 HMRC, September 2019
The Last Word
“Mick Jagger’s living room looks as unremarkable as anyone else’s.”
– Actor, writer, and television presenter Sir Michael Palin on the levelling effect of online communication.
The information contained is correct as at the date of the article.
Aristotle and BlueBay 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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