Sunday, August 16, 2020

The City and the Coronavirus

The economic collapse in Britain during the second quarter of 2020 was the worse on record. Unemployment is forecast by the Bank of England to soar to 2.5m by Christmas. The Brexit cliff edge approaches. Yet in the City, the FTSE 100 has been on the up.

The FTSE jumped 2% on the same day it was revealed the economy had slumped by 20%.

Even if unemployment surges, and consumer spending in the UK fails to recover fully, the stock market can continue rising.
Three out of the four biggest companies in the FTSE 100 were this week trading at share prices above their levels at the start of 2020, as if the pandemic never happened.
Unilever, maker of consumer goods from Domestos to Ben & Jerry’s ice cream, was trading at about £45 a share this week, compared with £43 in January. Drug giant AstraZeneca (boosted by vaccine hopes) is fetching £85 a share from £68 in January, and even mining conglomerate BHP (largely Australian, but listed in London) is a smidgen above its January price.
Ocado, the food delivery firm, has leapt in value and now has a total stock market capitalisation (£17bn) that is significantly greater than Sainsbury’s and Morrisons combined.
The FTSE 100 is yet to fully recover to the 7,500 level it enjoyed before the lockdown, but the steep market fall in February and March – when it dropped below 5,000 – is now a distant memory. Some pension funds, such as the Nest scheme which covers 9 million “auto-enrolled” workers, are back to where they were before the pandemic. Nest’s default pension fund currently has a unit price of 207p, compared with 208p at the start of January. The millions of UK savers in Nest may cheer the recovery of their funds, but it has little do with the performance of the UK. The five biggest holdings in the Nest default fund are all American: Microsoft, Apple, Amazon, Google and Johnson & Johnson.
UBS, which styles itself as the world’s “leading wealth manager” with $2.3tn under management, thinks UK shares, and sterling, will go even higher. Its economist Dean Turner said the worst of the slump in the economy is over, there is a strong bounce-back in activity, and pent-up consumer demand will power a strong recovery later in the summer and into autumn.
“In our view, UK assets look undervalued. In this environment, we continue to maintain a preference for UK equities relative to other eurozone stocks, and expect sterling to strengthen versus a weaker US dollar over the next 12 months,” said Turner.
Some big investment groups suggest that even if there is a downturn later in the year, the Bank of England will rescue investors by injecting money into the market, known as quantitative easing (QE). Previous rounds of QE have pushed up share prices, although critics say it increases wealth inequality.
BNY Mellon Investment Management chief economist, Shamik Dhar, says: “If the recovery does stall, or turns out to be significantly less positive, then I expect the government to step in with further fiscal measures, extending job and income support programmes, and the Bank of England to step in with more QE towards the end of the year.”
Fidelity, one of the world’s biggest investment groups, is rather less confident.
 Investment director Tom Stevenson said: “No one knows exactly what the recovery from coronavirus will look like – particularly with the potential for a second wave of infections and further local lockdowns - but it is likely that it will be a slow crawl towards pre-Covid levels with further government stimulus needed to restore sustained growth … Much depends on whether rising unemployment creates a negative feedback loop into lower appetite to spend and invest.” 
Fidelity reckons that holding gold – a standard safe haven in troubled times – may still make sense.

No comments: