29 September 2020
Another week, and another landmark political speech for us to digest – this one in the form of Chancellor Rishi Sunak’s Winter Economy Plan, which was given after the Treasury scrapped the usual Autumn Budget in favour of further special measures to deal with COVID-19.
Goals for the government now include an effort to reduce spending on job support schemes while at the same time limiting damage to jobs and the economy. Plans now include a wage subsidy scheme similar to the one that exists in Germany, which will replace the furlough scheme that finishes in October. The scheme will pay a portion of worker’s wages, as long as their employer is prepared to offer them at least a third of their typical hours. And thanks to unofficial announcements appearing in the press in the days running up to the speech, the news was met with only a muted response from UK markets.
The question on everyone’s lips is, of course, will it work? And some experts believe that it will help to limit further economic damage to the UK. Capital Economics suggested that “they go some way to cushioning the blow to the economic recovery from the new restrictions to contain COVID-19 and limiting the long-term hit to unemployment… [but they] won’t eliminate the hit entirely.” They expect GDP to stagnate during the final quarter of the year, and not return to its pre-crisis level until the end of 2022.
Second wave fears affect stocks
Rising infection rates and slowing economic recoveries across the continent had an effect on European stock markets as they slid during last week – airlines, car manufacturers and banks were all among the biggest fallers, as these are more likely to be affected in the event of a downturn. They did, however, rebound on Monday.
Markets in the US were similarly down after the Chairman of the US central bank warned that Congress needs to agree on a new economic stimulus plan soon, warning: “The economy is recovering robustly, but we are still in a deep hole.”
But while they’ve agreed on the need for a stimulus, Republicans and Democrats disagree over how big the package should be; this lack of progress has been a heavy weight on investor sentiment recently. Last week, Democrats provided a new source of optimism with the news that they have begun a new proposal.
What all this means for investors is that you should continue to expect volatility in equity markets. As winter approaches without any vaccines, markets are prone to ups and downs, as Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, has noted.
“For now, it seems entirely plausible for stocks to rally or fall by 10% in the space of the coming week without very much ‘new news’ at all,” he said.
However, he adds that while the short-term outlook points to more volatility, the longer-term prospects for markets are brighter: “Ultimately, we believe that policy support and a better outlook in 2021 will mean that the current market correction does not extend too far.”
US election looms
This week, we’ll see the first live debate between the two US presidential candidates. While there have been plenty of headlines and speculation generated by campaign trail rhetoric, leading to market jitters, it’s important to remember that the outcome of the contest isn’t inherently good or bad for investors as long as they think strategically, and for the long term.
“Although the market likes to focus on events like elections, political trends tend to play out over months and years. Politics can create short-term noise, but if you can withstand the volatility, it’s best to sit on your hands and wait for it to pass,” noted Johanna Kyrklund, Chief Investment Officer at Schroders and Manager of the St. James’s Place Managed Growth fund.
“The more important topic for markets is COVID-19. The identity of the next US president is a sideshow in comparison.”