Avellemy Commentary for July 2020
COVID continued to occupy markets' attentions in July, with positive messages on vaccine development and trials giving investors a boost on the news. However, it is important to understand that there is some way to go before a vaccine will be available to all of us. While there are over 160 vaccines being developed around the world, less than 30 have reached the point of human trials. Only one - from US firm Moderna - has reached 'Phase III'; in late July, researchers began recruiting 30,000 volunteers across the US to receive a vaccine or a placebo, who will then be monitored to see if they catch the virus. It will be approved as 'effective' if it protects more than 50% of those given the vaccine.
Investors were also reminded that relaxing lockdown restrictions too early can be counterproductive. The World Health Organisation recommends that the percentage of tests that are positive should remain below 5% for 14 days before starting to reopen an economy. However, since the beginning of July the UK and other European countries are seeing increased rates of new cases that have coincided with attempts to extend the reopening of their economies. It appears that the increases however are confined to particular regions and 'hot-spots', rather than across the entire population.
In the US, the rate of new cases is now falling from its peak on July 25th but the rising number of deaths still gets the headlines, despite the fact that this is set to fall, given the mortality rate lags the new case rate by around three weeks. It does appear that a better understanding of the required care and the selective use of anti-inflammatory and antiviral treatments is reducing the length of hospitalisations too. Meanwhile, companies have announced second-quarter earnings somewhat higher than expected; these positives helped the S&P index of 500 largest US firms to rise by almost 6% over the month. UK-based investors did not benefit from this however, as the dollar weakened versus the Pound by a similar amount.
In Europe, EU members finally agreed a €750bn support fund in response to Covid-19, while in counterpoint the UK Chancellor is withdrawing the furlough scheme that has protected the jobs of over 9 million people at a cost of more than £25bn. There is clearly a risk that jobs may disappear if economic recovery stalls, so reductions in stamp duty, VAT cuts for certain sectors and offering companies £1000 for retaining a furloughed employee for 6 months are attempts to mitigate that possibility. UK shares continue to be less attractive to global investors, and the FTSE index of our largest companies fell by over 4% during July.
While equity markets remain subdued, Gold has reached an all-time record price of over $2000 an ounce. It is seen as a store of value in times of trouble, and COVID is certainly in that category, but that alone does not explain a 100% price rise in 2020. Gold is not an investment - it is a yellow, shiny instrument of speculation; essentially, we pay people to dig it up, then to guard it. Among its absence of investment credentials is its inability to generate income. Counter intuitively this general disadvantage may explain some of the excess demand for Gold; there is not a lot of income around. Around $14 trillion of the worlds debt issues currently have negative yields. The UK's benchmark 10-year Gilt pays £4.75 income, but will cost you £147, providing a guaranteed capital loss of over 30% if held to maturity in 2030. This equates to an overall yield of less than 0.1%. Cash deposits return virtually zero. Companies are cutting their dividend payments. Consequently, Gold's lack of income looks less important.
However, before you consider bombarding your adviser with requests to hitch your wagon to this latter-day Gold Rush, I am old enough to remember its previous record price of $2246, achieved over 40 years ago. In January 1980, retail investors brave enough to empty Building Society accounts paying 10.5% interest to exchange for gold coins were rewarded by a 20-year decline to $384 in 2001. Not the most glittering of prizes, I'd imagine...yet another reminder that a diverse portfolio of 'real' assets remains the best option for longer-term investors.