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.
Roundup
The S&P 500 had its best August in 34 years in what very a much risk-on end to the summer. Gold’s rally took a breather while 10-year government bond yields in the UK and US were up sharply (pushing bond prices down) as technology continued to propel the post-March recovery in markets.
| wdt_ID | Exchange rate | 8/31/2020 | Change on month % |
|---|---|---|---|
| 1 | GBP / USD | 1.31 | 2.20 |
| 2 | USD / EUR | 0.85 | -1.30 |
| 3 | USD / JPY | 105.83 | 0.10 |
| 4 | USD / CHF | 0.91 | -1.00 |
| 5 | USD / CNY | 6.98 | -1.80 |
| wdt_ID | Indicator | 8/31/2020 | Change on month % |
|---|---|---|---|
| 1 | Oil (Brent) | 45.28 | 4.60 |
| 2 | Gold | 1,967.80 | -0.40 |
| 3 | US Tsy 10 yr yield | 0.70 | 33.40 |
| 4 | UK Gilt 10 yr yield | 0.31 | 199.00 |
| 5 | Bund 10 yr yield | -0.40 | -24.20 |
Global
COVID ‘winners’ leaving ‘losers’ behind
Teddy Tulloch, chairman of EP Global Opportunities, says it is difficult to gauge the strength of the recovery with unemployment likely to increase for a while and further corporate bankruptcies seen as inevitable. He adds that while it is expected that any faltering in the recovery will be met with further stimulative measures, governments have already significantly increased their budget deficits.
Murray International’s manager, Bruce Stout, provides a region-by-region overview of the current state of affairs. The expectation is for every major economy to contract, against a backdrop of lower growth, record low bond yields and companies struggling to achieve meaningful earnings growth, in the short term.
Witan’s chairman, Andrew Ross, discusses the extreme performance differential between the ‘COVID winners’ and ‘COVID losers,’ since March. He says that those that recall the dotcom boom in 1999 know well that stocks can get ahead of themselves, even when the subsequent achievements of technology outstripped assumptions made at the time.
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Flexible investment
Inflation to remain subdued or even negative over the next year
Peter Hewitt, the manager of BMO Managed Portfolio Growth, believes that that inflation will remain subdued, or even move close to negative over the next year and interest rates in the UK, Europe and the US will also remain at extremely low levels. He adds that the case for exposure to sectors which offer secular growth characteristics remains in place. When inflation and interest rates are low and growth scarce then investment companies focussed on sectors such as technology, healthcare and biotechnology are likely to continue to prosper.
It has been a very challenging valuing many illiquid asset classes
Henderson Alternative Strategies’s chairman, Richard Gubbins, says that for many illiquid asset classes, net asset values for the first quarter will not be available for some time and the full financial impact will take time to become clear. The consequence of such limited visibility is reflected in wider spreads for many assets.
The manager of RIT Capital Partners believes that even if very low-interest rates make equities the ‘only show in town’ for some investors, a significant amount of good news is already priced in.
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UK
Second-quarter reporting by companies will dictate the next leg of credit market reaction
Acorn Income’s managers, Chun Lee and Robin Willis note that financial markets have been predominately focussed on the benefits of massive stimulus and less so on the risk to growth from the fallout of the pandemic. In their view, the second-quarter reporting season could therefore lead to a further weakening of credit metrics leading to more downgrades from credit rating agencies.
William Meadon and Callum Abbot, managers of JPMorgan Claverhouse, reflect on the fact that going forward, much rests on what kind of economic and earnings recovery arrives in the post-pandemic world and whether stimulus packages can offset the damage inflicted by shutdowns. The sheer magnitude of central bankers’ intervention suggests they are extremely concerned about long term economic scarring. They clearly worry that lingering economic weakness may soon become a problem for all.
The UK’s prospects appear particularly unclear with uncertainty over Brexit lingering
The manager of Aberforth Smaller Companies believes that the prospects for the UK seem particularly unclear. This is reflected in sterling’s leadership in the foreign exchange unpopularity contest, with 7% drops against both the dollar and the euro in the first half. Several of the attributes that have made the UK an attractive economy in which to invest seem under threat. Dividends have been slashed, pre-emption limits have been relaxed, the government has greater influence on the corporate sector and rules are being set informally without clear legislation. The manager says that as temporary adjustments to cope with the impact of COVID-19, these are understandable, though a greater role for fiscal spending was likely even before the onset of the virus. The concern is that they herald more lasting changes at a time when the UK’s future relationship with Europe and the future openness of its economy are moot.
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Global emerging markets
Many emerging markets have been less affected by the pandemic
The manager of Ashmore Global Opportunities discusses why most emerging markets have been coping relatively well through the pandemic.
Michael O’Brien, the manager of Fundsmith Emerging Equities, believes that in terms of structural change, the three biggest impacts will be formalisation, digitalisation and consolidation. It is also noted that the economic impact of COVID-19 on emerging markets is lower than that in the developed world, with most emerging markets are also forecast to revert to growth close to their long-term rate next year.
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Hedge funds
The stock market rally has been distorting the reality on the ground for most businesses in the UK
In explaining the stock markets resurgence, Bill Ackman, manager of Pershing Square, says that we have a corporate inequality phenomenon in addition to an income inequality problem. He says that if there were a stock market index of private, small businesses, it would likely be down 50% or more.
The manager of the BH Global and BH Macro funds, says that so long as a V-shaped recovery in risky assets fails to create a V-shaped recovery in economic activity, this tension is a recipe for increased volatility.
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Other
We have also included comments on North America from JPMorgan US Smaller Companies and JPMorgan American; Europe from European Assets and Fidelity European Values; Asia Pacific from Aberdeen Asian Income; Japan from Fidelity Japan; India from Aberdeen New India; debt from City Merchants High Yield, Axiom European Financial Debt, and Riverstone Credit Opportunities Income; private equity from Apax Global Alpha, BMO Private Equity, Princess Private Equity, Pantheon International, and LMS Capital; technology & media from Allianz Technology; infrastructure from BBGI SICAV and Premier Global Infrastructure; renewables from Renewables Infrastructure; the environmental sector from Impax Environmental Markets; commodities & natural resources from BlackRock World Mining and Riverstone Energy; UK property from Empiric Student Property, Impact Healthcare REIT. Tritax Big Box, and UK Commercial Property REIT; and Irish property from Yew Grove REIT.
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Full version
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