Wellesley WeeklyWatch – Trump tests positive for coronavirus while the UK struggles to agree Brexit terms
06 October 2020
“Tonight, @FLOTUS and I tested positive for COVID-19. We will begin our quarantine and recovery process immediately. We will get through this TOGETHER!”
This was the tweet that hit social media on Friday, with just one month to go until the US elects its next president. As the news sank in and investors unravelled what this might mean, stock markets in Asia, Europe and the US all dipped.
The upcoming election meant that investors were already preparing for more volatility in the markets, but this news threw even more uncertainty into the mix – what effect, for example, will it have on the final month of campaigning? Could it de-rail the scheduled next round of debates between the two contenders? If, as his doctor suggested over the weekend, President Trump is indeed discharged this week, its effect could actually be minimal.
Another question that is difficult to answer is what this illness might mean for the President’s popularity. UK polling company YouGov pointed out on Friday that after Boris Johnson was hospitalised with the illness in April, he did see a small increase in personal popularity – there was no increase in support for his government more generally, however.
And after bouncing back quite quickly over the summer, US jobs data released on Friday suggested that the country’s economic recovery slowed during September; the unemployment rate is now at 7.9% as compared with 14.7% at its peak in April, a definite challenge for the incumbent president as the election draws closer.
During their first live television debate during last week, the exasperated moderator struggled to stop the contenders from devolving into personal insults. Jim Henderson of Aristotle, which manages the St James’s Place North American fund said the contest seemed like a “schoolyard scuffle”, adding : “In a country of 330 million people, the fact that our choice has boiled down to Donald Trump and Joe Biden is nothing short of embarrassing.”
Senate disagreements continue
Negotiations around a new COVID-19 fiscal stimulus bill mirrored this tension. Democrats and Republicans are not any closer to agreeing how large it should be – while the House of Representatives passed a $2.2 trillion bill last week, it’s unlikely to make it through the Senate until it’s closer to the $1.6 trillion counteroffer argued for by the Treasury Secretary Steven Mnuchin. Both parties may agree on the need for more stimulus in order to continue the US economy’s recovery, but the inability to agree on how much has weighed on US markets.
Returning to last week’s news, Sean Markowicz of Schroders, managers of the St. James’s Place Managed Growth fund, wrote: “Barring a serious deterioration in Trump’s health (or Biden’s), this is unlikely to have a significant impact on the US election outcome. Presidential debates seldom change voter preferences and this time should be no different.
“The market’s negative reaction can be interpreted as a sign that Biden’s odds to win the election have increased. Nevertheless, investors should not assume that a Biden win would be unequivocally bad for markets.” In fact, investors would do well to remember that data shows stock markets have a tendency to perform fairly similarly under Democrat and Republican presidents.
Brexit negotiations remain tough
In the UK, meanwhile, Brexit trade negotiations are now entering their final stage. An intensive round of talks in Brussels ended last week without agreement, and European commission president Ursula von der Leyen told reporters that there was “still a lot of work to do.” However, she added: “Where there is a will there is a way.” It is still the issue of a ‘level playing field’ that is the key point of difference – the rules that govern levels of support that governments can give to certain industries.
There is a sense that markets expect a compromise to be reached, although the realistic deadline for that deal is the end of the month, according to European negotiators. On Saturday, Mr Johnson and Ms von der Leyen agreed to become personally involved in the talks to help get them over the line, while the EU’s legal challenge to the UK’s Internal Market Bill is ongoing.
These talks are likely to create more volatility in the short term, but the UK’s longer-term prospects will be dictated by post-Brexit policy decisions, writes Arnab Das from Invesco, which manages several funds for St. James’s Place.
“The Johnson government’s policy decisions in coming months will drive the UK’s long-term trajectory and success or failure, beyond both Brexit and COVID-19.”
He adds that the prospects of the UK as an investment destination will be determined by the government’s “economic, financial, tax and industrial strategies as it returns to the ‘levelling up’ agenda – and above all, whether the UK’s traditional strength as an open, predictable, free market economy is enhanced or weakened”.
A study last week by analysts at Numis Securities showed that the value of financial advice to someone investing for their retirement is about 2%. On average, a person investing for their retirement over a period of about 10 years generates returns that are 2% higher per annum if they take advice, compared to someone who doesn’t. The Numis team compared annual returns for a typical St. James’s Place pension client with the returns achieved by someone whose pension is self-invested.
What could explain the difference? Part of it is that financial advisers can help to guide investors through periods of market turmoil. Without this advice, some people may be more tempted to make market-timing decisions that can eat into the long-term growth potential of their investments. Taking the pandemic as an example, when it took hold in March the sharp fall in global stock markets will have prompted some investors to more actively trade their portfolio, attempting to take advantage of the volatility. It is very difficult however, to get this kind of market timing consistently right. Investors who sat tight were rewarded, as markets recovered strongly over the following six months, with some indices now above where they were at the start of 2020.
This is worth remembering as we head into the final months of the year. Several headwinds have combined to create an environment that might cause markets to become bumpy in the coming months: these include concerns about a second wave of COVID-19, the US election, trade tensions between the US and China, plus Brexit trade talks.
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In the Picture
The airline industry is a challenging one at the best of times – battling with high costs, slim profit margins, and a tendency for a sudden disappearance of passenger bookings to happen in times of conflict, illness or recession. This year’s drop-off, however, has been especially striking. Passengers may be returning to the skies, but in far lower numbers than they were at this time last year. While there is every reason to believe that demand for flights will return, but the industry can likely expect fewer passengers until the pandemic has been brought under control.
The Last Word
“This is just the kind of grotesque mischaracterisation and gratuitously personal insult that I’ve always loved so much – when it’s done to other people.”
– Piers Morgan assesses his caricature in the recent remake of Spitting Image, a satirical puppet show.
Aristotle, Invesco and Schroders are fund managers for St. James’s Place.
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