WeeklyWatch – Holidaymakers scramble to beat France quarantine

17 August 2020

Stock Take

New quarantine restrictions catch out holidaymakers

There was more bad news for Brits abroad last week, as the government added France to the list of countries with quarantine restrictions. Upon the news, panicked holidaymakers abandoned their plans and rushed to book the last remaining tickets in order to get back to Blighty before the quarantine rule came into place on Saturday morning.

The move added to fears of a second wave of the pandemic, with France reporting over 12,000 new cases last week. European stocks slumped on the news, with tourism-related companies unsurprisingly taking the brunt of the drop. The Netherlands, Malta, Monaco and Aruba were also removed from the quarantine exemption list on Saturday.

This slump added to the UK’s already challenging outlook – with economic data showing that the economy shrank more than 20% in the second quarter of the year – worse than any other major country.

The pandemic has distracted us from Brexit, but concerns are growing about the UK’s future trading relationship with the EU, and the prospect of a ‘cliff-edge’ no-deal scenario. There’s still a real risk that the ongoing trade talks will fail to produce a deal, argues Guy Stephens, Technical Investment Director at Rowan Dartington. He adds:

“While the absence of the endless political discussion has been welcome, most would probably choose Brexit tedium over COVID-19. However, not unlike the virus, it continues to fester and there are serious economic implications this winter if we don’t get on top of it.”

The US election looms

Across the pond, Joe Biden picked Kamala Harris as his running-mate in the upcoming election battle last week. The former lawmaker is viewed as a moderate voice by many observers, and her appointment has gone down well on Wall Street.

What it might mean for the race is unclear, because the context of the pandemic means that the outcome of the election is less significant for markets than it would be in normal times. The winner’s biggest task will be ensuring the country’s recovery from the blow of COVID-19 – leaving less room for divergence on other issues. Andrew Hunter, Senior US Economist at Capital Economics, suggests:

“With fiscal and monetary policy to remain loose regardless of who wins, we doubt the election will have a major impact on the outlook for economic growth in 2021 and beyond.”

Investors are more focused on the shorter-term challenges facing the world’s largest economy. The biggest of these is the response to the pandemic, and, more particularly, whether Congress will agree on another package of economic support for workers and companies. Talks have broken down in Washington on the potential deal.

Light at the end of the tunnel for the US economy?

Investors are also keeping a keen eye out for any glimmers of hope for economic recovery – and last week, a couple of pieces of data pointed towards some green shoots in the US.

Jobs data showed that fewer Americans are applying for unemployment benefits – the second straight week of lower applications. Hot on the heels of this positive news was data that suggested that the prices of US consumer goods are rising again.

US stocks continued their advance last week. The S&P500 stock index has now regained all its losses since the pandemic took hold (although the recovery isn’t spread evenly – as discussed in the last WeeklyWatch, big tech companies have done disproportionately well). Some investors also sold off US government bonds – which can be interpreted as a sign of confidence in the country’s economy (because it’s a sign of sellers seeking riskier investments elsewhere).

How emerging markets have responded to the pandemic

Emerging markets have had a range of approaches to dealing with COVID-19. Some, like China and Vietnam, have been relatively successful, while others, like Brazil, have responded badly.

China has recovered faster than most major economies, helped by stringent lockdowns that prevented the spread of the virus. Even so, data released on Friday showed that Chinese shoppers spent less than expected last month.

But even in countries struggling from the outbreak of COVID-19, some companies will continue to thrive and generate returns for investors, argues Ajay Krishnan from Wasatch Global Investors, which manages the Emerging Markets Equity fund for St. James’s Place. He says:

“There are opportunities to be had – we just have to look carefully, to understand and anticipate some of the changes that are occurring.”

He picks out Argentina – a country that is struggling to repay its debts while also grappling with coronavirus. The fund owns an Argentinian e-commerce company called MercadoLibre, which announced last week that its revenues grew more than 120% in the last three months compared to last year, reaching $878 million.

As Krishnan notes, a fund manager’s job is to pick a small number of companies that are expected to perform well over the long term. And even in the most challenging times, there will be success stories.

Wealth Check

It’s been a bumpy year for stock market investors. A bull run that had lasted nearly 11 years came to a shuddering halt in early February as the COVID-19 pandemic hit, followed by the shortest and sharpest correction in stock market history – but a rapid bounce-back was brought about by quick action by governments and central banks.

But despite the stock market shocks, keeping sight of your long-term objectives is key. It may be tempting to let your emotions take over – to panic and sell at the first sign of trouble, or to time the market and buy low, hoping to sell for a profit when prices recover.

But losing your nerve or trying the time the market can prove very costly. And this time was no different because, just like previous stock market crises, some of the biggest market moves – in either direction – happened in just a few days. Whether or not you are invested on those days can make a big difference to your long-term returns. The problem is that no-one knows when they are going to happen.

As the chart below shows, a notional investment of £1,000 into the S&P 500 index on 1st January would have been worth £1,065 by 23rd July, if it had been left alone as the markets gyrated. Yet, missing just the ten best days of returns over that short period would have reduced the investment to £616.

It is worth remembering that the best periods for stock markets often follow some of the worst days. However, if you react to the bad days, you are very likely to miss the good ones. Of course, it can be difficult to sit tight as your investments fall in value. But history shows that, to achieve your longer-term financial goals, you need to stick to the plan for how long you intend to invest. An experienced financial adviser can take the emotion out of it – they will put the current volatility into perspective and explore how a flexible financial plan will stand you in the best stead for the future.

Source: Bloomberg. Data shown is for the S&P 500 Total Return Index. Past performance is not a guide to future returns. Illustrative index returns do not take account of the costs and charges of investing.

S&P 500 Index discrete one-year returns

Jul 2019 – Jul 2020 Jul 2018 – Jul 2019 Jul 2017 – Jul 2018 Jul 2016 – Jul 2017 Jul 2015 – Jul 2016
3.8% 14.9% 16.1% 16.1% 23.2%

Source: Financial Express Analytics. Data shown for the S&P 500 Total Return Index. Past performance is not a guide to future returns.

In the picture

The UK might have suffered the most during Q2, but no major economy has escaped the effects of the pandemic – as recent economic data shows:

The Last Word

“We are determined to work through the challenges imposed on us by this year’s circumstances and to select fairly those students of greatest potential who will thrive in their studies here.”

– The University of Oxford announces that over half of the students who were awarded lower-than-expected grades by a government algorithm have now been admitted to the university. Many of these students come from disadvantaged backgrounds.

The information contained is correct as at the date of the article.

Wasatch is a fund manager 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.

FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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