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Foster Denovo|News & opinion|Opinion|Market Briefing – 21st October 2020

Market Briefing – 21st October 2020

Covid-19: Know your alphabet


As television presenters often say when discussing brands that either haven’t paid for advertising or if on the BBC, haven’t paid at all, ‘other cars are available’. Nevertheless, the letters V and W have never had such a potential short-term impact on the global and UK
economies.

“V-shaped recovery is a type of economic recession and recovery that resembles a “V” shape in charting. Specifically, a V-shaped recovery represents the shape of a chart of economic measures economists create when examining recessions and recoveries. A V-shaped recovery involves a sharp rise back to a previous peak after a sharp decline in these metrics.

A V-shaped recovery is characterised by a quick and sustained recovery in measures of economic performance after a sharp economic decline.

Because of the speed of economic adjustment and recovery in macroeconomic performance, a V-shaped recovery is a best case scenario given the recession.”
Source: Investopedia(1)

Focusing on the UK, the ‘V’ shaped recovery since mid-April is seemingly coming to an end. Mainly due to the rise in Covid-19 cases and the introduction of local alert levels (tiers) in England and ‘circuit breaks’ or ‘fire breaks’; the new brands for lockdown used in the other three UK nations.

As the graph shows, the peak of the recovery, measured by how fast the economy was growing, occurred in mid-June with the summer months showing a fall back.

As the Office for National Statistics (ONS) have said, “Monthly gross domestic product (GDP) grew by 2.1% in August 2020 as lockdown measures continued to ease. This is the fourth consecutive monthly increase following a record fall of 19.5% in April 2020.

August 2020 GDP is now 21.7% higher than its April 2020 low. However, it remains 9.2% below the levels seen in February 2020, before the full impact of the coronavirus (Covid-19) pandemic.”(3)

So a ‘double dip’(4) recession seems increasingly likely as actual and proposed Covid lockdowns begin to impact UK consumer movement and confidence. The autumn months so far may not have seen a continuation of the falling line above, but what can be said is that it is unlikely to have risen.

A major contributor to creating the W shaped recovery is the stop-start pattern of the different restrictions.

One positive – if it can be called that – is that a more localised approach in England, combined with the devolved nations of Northern Ireland, Scotland and Wales making their own decisions, may mean that a full national lockdown may not be repeated. This could soften the blow of the restrictions when compared with the full UK wide lockdown.

Many of us have also got more used to ‘living with the virus’. People may not be going to the pub after work, but for those outside localised circuit breaks and devolved fire breaks, enjoying themselves on a Friday or Saturday night in a restaurant may be on the cards. That said, all indications show a slowdown in growth since the summer – as shown by the graph above. There is a great chance that there could be a complete standstill and the downwards line above continues, therefore creating the W shape.

However, there is confidence that there will be a rebound at some point in the future to create the second V in any W shaped recovery. Furlough and other financial aids to businesses are helping, although recovery isn’t being seen across the whole UK but in different areas, creating two speed, perhaps even three or four speed, recoveries. There are also differing levels of confidence in how businesses have reacted to these unprecedented times. Their degree of flexibility and resilience, for both households and workers, has been remarkable and should be praised.

Brexit
If someone had said that Brexit would not be the major topic of conversation in the press a year or so after one of the original Brexit Day deadline dates, 31st October 2019, we would likely have gawked at them in disbelief. Nonetheless, with the pandemic, that is exactly what has happened.

Whatever your political views, the hour is fast approaching when the UK will leave the EU single market with its frictionless trade after the 2020 transition period. The impact of this will be significant for the pound and UK financial markets. As has been reported recently, there remain some key hurdles to an agreement. The UK wants to maintain access to the single market, but in wanting to have ‘sovereignty’, it does not want to adhere to EU regulations. In other words, potentially a ‘square peg in a round hole.’

That said, there is still room for compromise on both sides. However, in true Noel Edmonds fashion, ‘Deal or No Deal’, the UK is leaving the transition period and going it alone. In the event of a deal, it’s likely to see the pound rise because it would remove the economic uncertainty of a no deal. A no deal on the other hand would potentially shock sterling, and numerical parity between the pound and euro cannot be ruled out where £1 is worth €1.

In terms of financial markets, it is far harder to predict outcomes. The market representing the UK’s top 100 companies has around three quarters of their revenue coming from abroad. And ‘abroad’ is being hit by Covid-19.

In a nutshell, no matter your political persuasion, it is a fact that markets do not like uncertainty wherever they are in the world, including London and Europe’s stock markets. There is more than enough uncertainty caused by the pandemic. To have further uncertainty caused by Brexit is in no one’s interests.

US Election
As if the pandemic and Brexit weren’t enough, there
is the US presidential election in less than 14 days.

Europe’s financial markets and economic prospects, including London’s and the UK, will be affected by whoever is in the White House from January 2021. However, in the short term there is a potentially serious risk to Europe’s economy between Wednesday 4th November 2020 and Wednesday 20th January 2021, the scheduled inauguration day of the next US president, should there be a contested election. This would lead to uncertainty and potentially a constitutional crisis.

Another issue at stake is trade. If Trump is re-elected there is the real possibility of a trade war with Europe. This shouldn’t be seen as anti-Trump rhetoric as he has claimed Europe in many ways has treated the U.S. worse than China. Both Europe and the US would see their economies suffer should a trade war happen so no amount of posturing would be good for either side.

What should this tell you?
No matter what short-term events occur – even the serious collection discussed above – and remembering that “past performance is no guide to future returns”, investors should ignore these short-term events; at least from an investment perspective. They should rather diversify across individual stocks and across different asset types (i.e. bonds as well as equities, etc.), across geographical jurisdictions (e.g. globally), across investment styles (i.e. active management and index/passive investing) and across different investment philosophies (i.e. growth and value).

It should be remembered that no matter how diversified a portfolio is across asset types, geographical jurisdictions, investment styles and philosophies, risk and reward do typically go hand-in-hand and, as such, risk can never be eliminated completely. It is also important to remember that we very often have a long-term investment time horizon. However, smart diversification across assets, geographical jurisdictions, styles and philosophies can help investors minimise their risks. Although it does not guarantee against loss, smart diversification is the most important component of reaching long-range financial goals while minimising risk.

As we have said before, we will continue to monitor the current financial situation and keep you notified of any changes that are made. If you would like to discuss how the current situation might affect you, then please seek professional financial advice to discuss your financial situation further.

Source

  1. https://www.investopedia.com/terms/v/v-shaped-recovery.asp
  2. https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/august2020
  3. https://www.statista.com/statistics/941233/monthly-gdp-growth-uk/
  4. What is a double-dip recession? A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession… After the initial recession has passed the recovery stalls and the second round of recession sets in just as, or even before, the economy has fully recovered from the losses of the initial recession. One good indicator of a double-dip recession is when gross domestic product (GDP) growth slides back to negative after a few quarters of positive growth. A double-dip recession is also known as a W-shaped recovery – https://www.investopedia.com/terms/d/doublediprecession.asp

This publication is marketing material. It is for information purposes only. This statement is for the sole use of the recipient to whom it has been directly delivered by their Foster Denovo Partner and should not be reproduced, copied or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought advice concerning the suitability of any investment from their Foster Denovo Partner. Potential investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.

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