Living in Extraordinary Times – Market Update – June 2020

11th June 2020

Living In Extraordinary Times – Market Update June 2020

Approaching 3 months into the UK lockdown, it feels appropriate to take a view on portfolio construction and look at what may happen next.

So first the good news…….

Your diversified portfolios will be closer to the values from the start of 2020, with much of the Covid-19 pandemic damage recovered.

You may recall that our update ‘Through The Shadows’ in March 2020 drew parallels between the similarity of the market falls seen amidst the 2008 global financial crisis. It took around 2.5 years for portfolios to recover after 2008. However, The recovery this time has come much more quickly in many stockmarkets, as illustrated below:

 

The obvious exception is in the UK which continues to drag. There are several possible contributing reasons:

  • UK stockmarkets typically provide a higher proportion of shareholder returns from dividends compared with other parts of the world. We have seen political pressure on companies to cancel dividends, with others taking the opportunity to conserve cash.
  • Trade negotiations have been overtaken by the pandemic focus but as lockdowns end, normal course of business will be resumed. Perhaps most pertinent is how the Irish border issue is going to be resolved and whether a trade deal can be agreed and implemented with less than 6 months to go.
  • However, when we consider the make up of the FTSE100, it is dominated by Consumer Goods and Services (30%) and Financials (19%) all directly impacted by the threat of recession. Oil & Gas also contributes 11% and there is little surprise that the slump in oil prices will also have influenced the index significantly.

Whilst the ‘bounce’ is comforting, we are not taking this as a signal that the problems have been resolved.

Officially, 15% of the US working population is now unemployed – unofficially the figure is closer to 20%. In the UK, the furlough scheme has kept the figure under 10% for now, but for almost every nation in the world, double-digit unemployment has become a threat.

Government intervention has dampened the effect, but with speculators predicting that the global economy is likely to shrink by at least 4% this year, there are clearly problems to deal with.

The monetary policy support has increased world government debt rapidly. The UK government borrowed £62 billion in April compared with the pre Covid-19 budget of £55 billion for the whole year.

The Future

Sadly. we do not have the inside track on why world markets seem to be ignoring the economic concerns. We cannot ignore the risks that still surround us both financially and from the uncertainty of a second pandemic spike as lockdowns are eased or removed.

The wave of stimulus has undoubtedly created an air of optimism that the world will not be allowed to fall apart financially.

On the surface, the rebound does seem to have been discerning – technology and consumer companies have rebounded, whilst airlines and oil producers have continued to suffer. That makes sense intuitively, because Amazon will survive COVID-19, while Virgin Atlantic may not. However, Amazon’s share price is now 30% higher than at the start of the year. Whilst it is true that Amazon is taking a slice of the pie from physical retailers, it’s also true that there is less pie to go around.

A second spike in COVID-19 would not only shrink the economy, it would also send confidence to rock-bottom. People would lose faith in the government, in the hopes for a vaccine, and in a quick return to normal.

Is This A Good Time To Be Invested or to Invest?

Without a crystal ball, we will never know when the ‘right time’ to invest is. Most important is to have a robust financial plan so that market interruptions are tested against the feasibility of meeting your future lifestyle plans and objectives.

A well-designed financial plan should keep you on track for the long term, ignoring short term market movement by being focussed on the overall outcome, rather than the day-to-day ups and downs.

If investing for the longer term, we believe that even in difficult markets we will see opportunities for return.

Contact HarperLees