WeeklyWatch – Investors unsettled as cure progress stalls

15 September 2020

Stock Take

The eyes of the world focus on vaccine trials

The progress of vaccines or other treatments for COVID-19 is playing a big role in investor confidence, as the world’s economic recovery depends, by and large, on how quickly a cure can be developed.

This sentiment was especially evident this week, when investors were disconcerted by the pausing of one of the most promising vaccines under development. The joint effort between AstraZeneca and the University of Oxford halted trials after one of its participants fell ill. Although common in this stage of the vaccine-development process, it serves as a reminder of how challenging it is to develop a vaccine at speed. The trial has since resumed.

Positive news for investors

Until a cure is found, markets will remain volatile as they react to good or bad news from different countries. India and Latin America are now focal points for the virus, and account for a high proportion of daily deaths.

However, there is some good news for investors, because many countries around the world are recovering well in economic terms – often despite their high case numbers. In the UK, for example, it was reported that the economy expanded by 6.6% in July – heartening news following fears of a second wave.

Meanwhile, across the pond, only a minority of states have reported a rise in cases in the past week. US equities steadied last week after their recent fall, which had been driven by a decline in the share prices of some large technology companies. The fall hasn’t led to a wider sell-off in other markets, and it’s also smaller than the large drop in March, when investors were reacting to COVID-19 fears and the onset of national lockdowns.

A natural correction?

Investors are looking at recent events as a natural correction to the record-breaking growth in the share prices of large technology companies since global stocks declined in March. Those gains have been so large that even after last week’s losses, the S&P 500 index of large US companies is over 3.4% higher than at the start of the year.

Perhaps stock market investors felt they were overdue another decline, because the drop in spring this year, while severe, was very short-lived. The drop in the S&P 500 in February and March was technically a bear market, but from peak to trough lasted only 33 calendar days and 23 trading days. That’s the shortest bear market ever.

Polina Kurdyavko of BlueBay Asset Management, Co-manager of the Strategic Income fund for St. James’s Place, notes:

“About 25% of the emerging market countries that we invest in will report positive GDP growth this year – which is quite stark compared to the GDP numbers presented in the developed world.”

She adds that China is leading the pack with its COVID-19 response:

“China is the only country which has had a stellar response, in terms of the shape of the economic recovery as well as dealing with the pandemic.”

Bank support still key

With support from governments and central banks keeping markets steady throughout the pandemic, any news from these intuitions is especially important for investors at the moment. Last week, the European Central Bank (ECB) announced that it will hold interest rates where they are for now, adding that there won’t be any additional stimulus in the short term. Christine Lagarde, Head of the ECB, nodded to the fact that the Euro has grown stronger in recent months, and to concerns that its strength might hamper the continent’s recovery. Meanwhile, investors will keep a keen eye on the US central bank, the Federal Reserve, when it meets again this week.

Brexit divorce tension

On more negative note in European relations, Brexit negotiations between the UK and the EU have become even more strained. Last week, the UK government revealed plans to override parts of its existing treaty with the EU (the Withdrawal Agreement), which among other things concerns customs regulations between Northern Ireland and the Republic of Ireland.

Because it bypasses the existing agreement, the planned move (the Internal Market Bill) has been criticised heavily for breaking international law. It has also prompted a sharp response from Brussels, which threatened legal action unless the Prime Minister makes changes to the proposal. The value of the pound fell as investors realised that talks might collapse, but the FTSE-100 index rose, partly because the large companies that make up the index earn much of their revenue in foreign currencies (so stand to gain when the value of sterling drops).

Last night, the Internal Market Bill passed its first hurdle in the Commons, with MPs backing the bill by 340 votes to 263. There is still time to reach an agreement, and last week’s tension could be resolved. But with the lack of a trade agreement already weighing on UK equities, the news increases the chance of the two sides failing to agree a deal.

Wealth Check

The UK housing market is a favourite topic in print and over dinner tables across the country – and no doubt the recent news that property prices surged to a record high last month will have fuelled further conversations.1 Prices rose at their fastest level in 16 years as the Stamp Duty holiday took effect and buyers sought new homes after months of living in lockdown.

Properties are selling at rates rarely seen since the 2008/9 financial crisis. But there are growing fears that this is creating a bubble in house prices that could deflate quickly as the market comes under pressure later in the year. Unemployment is expected to rise as the furlough scheme tapers away at the end of October, while the Stamp Duty exemption on property values up to £500,000 finishes in March next year.

Mortgage lenders are already looking at minimising the expected fall-out by cutting the number of deals available, particularly for first-time buyers and those with lower deposits. Borrowers with a 10% deposit could have chosen from nearly 800 deals in March, according to Moneyfacts, but that number has now fallen to around 60.

What’s more, some large lenders are not considering applications from people on furlough or without a return to work date, plus self-employed people are also being asked for more information when they apply for a mortgage.

Paul Johnson, Senior Banking Manager at St. James’s Place, suggests:

“Lenders are concerned that property prices will peak next year before falling significantly, which may create negative equity for some homeowners. By reducing the loan to value rates, they are trying to ensure there is enough equity in the property as a buffer if prices fall.”

1 Source: Nationwide House Price Index, August 2020

Your home may be repossessed if you do not keep up payments on your mortgage.

In the picture

What are the things that you want to do? And when do you want to do them? These may seem like two simple questions, but they hold the key to making sure our investment plans start with the end in mind. In the video below, Andrew Shaw, Head of Partner Development & Communications at St. James’s Place Wealth Management, explains why.

The Last Word

“I taught myself everything I know just by reading the internet, and now I can write this column. My brain is boiling with ideas!”

GPT-3, a language generator programme from OpenAI, makes its journalistic debut.

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

BlueBay Asset Management 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.

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