Economic & Political Roundup
Kindly sponsored by Allianz
A collation of recent insights on markets and economies taken from the comments made by chairmen and investment managers of investment companies – have a read and make your own minds up. Please remember that nothing in this note is designed to encourage you to buy or sell any of the companies mentioned.
Markets were less prolific over June, as the emergence of a second
wave of infections in the US raised the spectre of the implications of
dialling back re-openings. It was a better month for Europe and
emerging markets, led by Asia, with countries that have managed the
pandemic best, continuing to re-open. Assets that are perceived to
provide safety, such as gold and the Swiss franc, also had good months.
|wdt_ID||Exchange Rate||6/30/2020||Change on month %|
|1||GBP / USD||1.24||0.40|
|2||USD / EUR||0.89||-1.20|
|3||USD / JPY||107.94||0.10|
|4||USD / CHF||0.95||-1.50|
|5||USD / CNY||7.07||-1.00|
|wdt_ID||Indicator||6/30/2020||Change on month %|
|3||US Tsy 10 yr yield||0.66||1.50|
|4||UK Gilt 10 yr yield||0.17||-6.50|
|5||Bund 10 yr yield||-0.46||1.60|
Melting away intertia
Sue Inglis, the chair of Bankers, says that while some initial indicators show growth resuming as economies re-open, it is too early to make reliable predictions. The chair of BMO Global Smaller Companies, Anthony Townsend, notes that the withdrawal of earnings guidance for 2020, by many portfolio companies, has rendered near term valuation metrics redundant. The managers of Monks believe the crisis is likely to accelerate many changes which were already underway, perhaps most obviously in the growth of digital solutions to consumption, entertainment, healthcare and business operations. Nick Train, manager of Lindsell Train, shares these sentiments. He also hopes that the relative youth of most emerging market populations, will spare them the worst of the disease. The manager of Edinburgh Worldwide, says Covid-19 will underpin wide-ranging changes in areas such as how we shop, travel, learn, operate businesses and treat disease We also hear from James Will, the chairman of Scottish. He sees one of the long-lasting legacies of the crisis being the consequences of the ‘whatever it takes’ actions to preserve jobs and prevent wholesale bankruptcies.
Around 160 companies in the FTSE all-share index have suspended their dividends, and the UK dividend future is estimating around a 47% cut
Eric Sanderson, chairman of Schroder UK Mid Cap, refers to the global financial crisis. He says that while recovery felt painfully slow at the time, the mid-caps that had genuine competitive advantages emerged stronger.
Miton UK Microcap’s chairman, Andy Pomfret, says that whilst the government has stepped in to bridge the huge shortage of corporate cashflow for now, this is only a temporary fix. With the major setback in profitability, numerous corporates now find themselves exceptionally short of cash.
Roland Arnold, manager of BlackRock Smaller Companies, says it is important not to lose sight of other global issues that can and will drive volatility. He cites Brexit, US/China relations, and the US election, fighting a battle for market dominance with central bank policy, fiscal stimulus, and asset flows, over the coming months.
Adam Avigdori and David Goldman, managers of BlackRock Income and Growth, note that around 160 companies in the All-share index have suspended their dividends, and the UK dividend future is estimating around a 47% cut. For now, they say that the language from the majority of companies has been to suspend, rather than cut.
The banking sector is better placed this time around
The manager of Gresham House Strategic expects the national discussion around ‘lives’ vs ‘livelihoods’ to intensify. They add that over-leveraged companies and weaker industry players going into this crisis may not survive, including many of the already loss-making businesses that have been increasingly in vogue in recent years, but the banking sector is better placed to deal with this stress than when it entered the global financial crisis of 2008-09.
Charles Montanaro, the manager of Montanaro UK Smaller Companies, notes that the bleak economic outlook sparked by the global response to Covid-19 mostly threatens businesses with structural weaknesses – poor management, a weak balance sheet, a lack of recurring revenue or pricing power.
Cyclical sectors could be sparked by improving newsflow
BlackRock Throgmorton’s manager, Dan Whitestone, thinks that the improving newsflow on the virus and the easing of restrictions has the potential to benefit depressed sectors like consumer services and financials.
Peter Jones, chairman of Henderson Opportunities, says that the debts incurred in both the public and private sectors will take a long time to pay down.
The manager of Baillie Gifford UK Growth notes that we cannot wish away the fact that it is likely that the most dramatic recession in UK history is pending and will cause damage whose effects are not clear. The manger also discusses some of the ‘digitalisation acceleration’ themes that are widely referred to across several extracts, this month.
Edinburgh’s manager, James de Uphaugh, discusses a number of themes, including consumer behaviour and working patterns; the role of the state; corporate strategies, and dividends.
Jane Tufnell, chair of Odyssean, says that despite the considerable fiscal and monetary support, it is highly unlikely that corporate earnings will suddenly bounce back to historic peak levels experienced in 2019.
Lowland’s managers, James Henderson and Laura Foll, believe the material work done by companies to reduce their cost bases will result in a substantial earnings impact, once a recovery begins in earnest.
In the UK market the miners, pharmaceuticals, telecoms and tobacco stocks continue to offer healthy yields
Iain Pyle and Charles Luke, manager of Shires Income, believe that good income sources do still exist. In the UK market the miners, pharmaceuticals, telecoms and tobacco stocks continue to offer healthy yields.
Jonathan Cartwright, chairman of BMO Capital and Income, says that looking further ahead, or indeed back for historic comparisons, suggests that if companies can recover their profitability within a couple of years then current valuations are attractive, certainly relative to the ultra-low returns available from bonds or deposit rates.
Commercial real estate has been hit hard
The manager of JPMorgan Global Core Real Assets discuses some of the ‘new normals’ created by the millennial generation, which they title ‘generation rent’ and the ‘e-commerce effect.’ In-depth outlooks for the real estate, infrastructure, and transport sectors.
JZ Capital Partners’s manager says that Covid-19 has been devastating to commercial retail real estate and may likely result in further write downs in the value of their real estate assets. Many of their retail tenants have not paid rent in April or May.
Some forecasters see a peak-to-trough hit to global GDP of 15%, and a year-average contraction of 8% for 2020. Such an outlook would be much worse than the 2008 Global Financial Crisis
Seneca Global Income & Growth’s manager reflects on how previous pandemics played out, noting that the closest scenario to the current crisis would be the Spanish Flu pandemic of 1917/18. The Dow Jones fell 33% during that crisis and, by the virus’s peak, this market had already begun to recover. These painful market corrections tend to be followed by strong markets. The trust had for a long time communicated its view that a downturn was likely in 2020 or 2021, though of course nobody expected one to be triggered by a pandemic.
Mike Brooks and Tony Foster, managers of Aberdeen Diversified Income & Growth, expect the near-term performance of financial markets to depend on how two competing forces are reconciled: economic fundamentals and financial market liquidity. They note that the economists in the Manager’s Research Institute forecast a peak-to-trough hit to global GDP of 15%, and a year-average contraction of over 8% in 2020. This is much worse than the 2008-09 Global Financial Crisis and is comparable to wars and the Great Depression.
Katy Thorneycroft and Gareth Witcomb, managers of JPMorgan Multi-Asset, note that their base case is that this is not a typical recession, as it is combining a credit crunch with a pandemic. They would expect weakness in Q2 followed by stabilisation in indicators and a staggered increase in growth. This will all depend on how long the suspension of activity continues for and the extent of stress within credit markets.
Biotech and healthcare
Elective procedures and clinical trials have been de-prioritised, though there has been a more limited impact on clinical trials in the oncology setting
Martin Murphy. CEO of Syncona’s manager, says that as a result of rightly focusing on managing Covid-19 patients, elective procedures and clinical trials have been de-prioritised. To date, they have seen a more limited impact on clinical trials in the oncology setting, where the acute need for treatments for patients in these disease settings is more severe, whilst in indications where there is an existing treatment or a lower mortality risk, they have seen trials halted and expect them to be more gradually re-established.
Worldwide Healthcare Trust’s chairman, Sir Martin Smith, discusses the fund’s view that the outbreak should not have a long-term detrimental effect on the healthcare industry. He adds that there has been some temporary negative impact to commercial sales, some delays for clinical trials and a more dilutive financing environment with the decline in share prices. However, sales of drugs taken by patients at home have been minimally impacted and supply chain disruption for the sector has been largely non-existent.
Biotech is in a “golden age” of innovation
Geoff Hsu, manager of Biotech Growth, discusses the wider potential of the biotech industry, noting that the sector is in a “golden era” of innovation at the present time. Several new technologies-including gene therapy, cell therapy, RNA-based therapies, and bispecific antibodies-are just beginning to result in marketed products to treat patients. We believe we are still in the early stages of realising the full potential of these technologies, as hundreds of pipeline candidates based on these technologies are still working their way through the drug development process.
Private equity has thrived historically on the opportunities provided by periods of market dislocation
The manager of HarbourVest Global Private Equity says that it is likely that new investment activity and exits will be markedly down on 2019 levels in the months ahead as the industry adjusts to a heightened level of uncertainty over the economic outlook and its potential impact across a broad range of businesses, both private and public.
Standard Life Private Equity’s lead manager, Alan Gauld, says they are seeing little M&A activity in the market, as sales processes are postponed until late 2020 and beyond. This will have a knock-on impact on the level of distributions received in the short term. The decline in M&A activity will be followed by a decrease in drawdowns, albeit at a later stage in the cycle than distributions. The manager remains confident that private equity continues to offer significant opportunity for long-term value creation, noting that all the company’s private equity managers weathered the global financial crisis and can apply their lessons from that time. In the short-term their experience and expertise will be largely deployed in helping their existing portfolio companies to mitigate the impact of Covid-19. Beyond this, he adds that private equity has shown time and again that it thrives on the opportunities that present themselves during periods of market dislocation.
The European Commission recently announced a series of measures that prioritise ‘greener’ investments
NextEnergy Solar’s chairman, Kevin Lyon, says that the price for electricity is driven by several factors that are proving difficult to predict under the current environment. He adds that the economic shock of Covid-19 has had a profound impact on oil prices and the prices of energy. Recovery in demand for electricity will be driven by the pace of economic recovery once the effects of the pandemic subside.
Tony Roper, chairman of SDCL Energy Efficiency Income, makes reference to the June 2020 announcement by the European Commission of a series of stimulus and recovery measures that specifically prioritise ‘greener’ investments, so as to simultaneously address national climate related targets, building amongst other things on the widening public appreciation of the benefits of reduced pollution levels during the economic shutdown and general awareness of climate change.
Renewable assets have been delivering cash more resiliently than many other asset classes
JLEN Environmental Assets’s chairman, Richard Morse, notes that established environmental infrastructure assets have generally performed resiliently and continued to generate cash even as other asset classes and market sectors have struggled.
We have also included comments on North America from BlackRock North American Income; Latin America from BlackRock Latin American; Europe from BlackRock Greater Europe, Montanaro European Smaller Companies, JPMorgan European Growth, JPMorgan European Smaller Companies, and Baring Emerging Europe; Russia from JPMorgan Russian Securities; Japan from JPMorgan Japan Smaller Companies, Aberdeen Japan, and CC Japan Income & Growth; Global Emerging Markets from Jupiter Emerging & Frontier Income; Growth Capital from Merian Chrysalis; Infrastructure from Sequoia Economic Infrastructure Income; Commodities and Natural Resources from BlackRock Energy and Resources Income; UK Property from Schroder REIT, AEW UK REIT, Civitas Social Housing, and Custodian REIT; and European Property from Schroder European REIT.
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