Avellemy Commentary September 2020 (For August)
After a tranquil break rediscovering the Shropshire and Welsh waterways on a seventy-foot narrowboat, returning to navigate the rather choppier waters of investment markets has been rather less relaxing.
The planet continues to adjust to constraints on personal freedoms and new ways of conducting business. COVID hotspots persist, particularly in India, and the US where a quarter of the world's cases have occurred, yet I suspect we're now entering a transition period. Generally falling infection rates (and more significantly mortality rates) suggest governments are moving from crisis management to coping strategies (e.g. the otherwise late-in-the-day adoption of masks), in advance of a vaccine (but see below) and a subsequent migration to a 'new normal'. Reported new cases around the world seem to have peaked at the end of July at around 290,000 per day. Most importantly, the COVID mortality rate has plummeted. In the UK for example, according to the Office of National Statistics, at this time of year around 9,000 deaths are typically recorded each week. In April, that figure averaged just under 20,000. August is back to normal, averaging 9,100 per week with daily COVID-associated deaths shrinking to single figures, a little over the death rate from road traffic accidents.
While stock market recoveries continue - low interest rates encourage investors to take more risk - those revivals are uneven. Gold has soared in 2020, up 33% in dollar terms at the beginning of August, to a nominal all-time high of over $2000 an ounce. However, in real terms, 1980's speculative frenzy in the yellow metal saw a high of $850, equivalent to $2800 in 2020. With ever-increasing supplies of money in circulation due to central banks' support for COVID-stricken economies, the price of gold will be higher in paper money terms, so speculators may feel there is more upside to come. However, after such a strong run it is difficult to “call” the future path for the yellow metal.
In the US, unsurprisingly healthcare and IT businesses performed particularly well, while energy companies' earnings suffered the most. The S&P index of the largest 500 companies rose by over 7% during the month in dollar terms. While August produced first-half company results around 30% lower than last year, nevertheless 80% of companies beat over-pessimistic expectations. Many companies have subsequently revised upward their expectations for the second half of the year. The Dollar has continued to weaken and has fallen by almost 14% versus sterling since lockdown on March 23rd.
Meanwhile, Apple's value broke the $2 trillion barrier, making the company worth more than the UK's biggest 100 companies combined, and two-thirds of the entire UK stock market value. I find that rather difficult to grasp, but the world is becoming more dependent on Apple products; it’s not simply the iPhone, but also a combination of product, content and services, along with increasing digital engagement through working from home.
Elsewhere, markets have lagged behind the Americans. In Europe, an agreement to establish a huge EU recovery fund has reassured investors about the cohesion of the Union; as a consequence, new money has modestly flowed into continental European markets, but returns were less than half those seen in the US.
In the UK, new cases of COVID rose in August but remain relatively low; the proportion of tests that are positive remains significantly below the World Health Organization’s recommended limit for reopening an economy. The UK government's Job Retention Scheme has managed to limit 'official' unemployment to less than 4% in the UK, roughly where it was at the end of 2019, however around 3 million workers are still furloughed. With the scheme set to end in October it seems unlikely that unemployment will remain at those levels.
UK companies' shares continue to remain out of favour with global market players. Unresolved Brexit negotiations have been (and remain) a turn-off for ex-UK investors. Furthermore, UK Gross Domestic Product (GDP), in effect the size of our economy, has collapsed by 22% since the end of 2019 due to lockdown, despite the latest monthly National Statistics data showing that GDP rebounded quickly in May and June by over 11%. Retail sales were robust as lockdown eased and restaurant bookings have been particularly strong thanks to the success of the government’s “Eat Out to Help Out” scheme. Around 64 million diners took advantage of this, and restaurants have claimed over £330 million from HMRC.
On the brighter side, ironically the strong pound, which has depressed the share prices of large exporters (whose goods become more expensive) has had little to no impact on smaller companies, who rely on their home market rather than exports. Funds investing in smaller companies have done well, rising by over 5% on the month, and a remarkable 44% since 19th March. What is more, there are some less obvious but positive signals underlining the recovery message. New UK company incorporations have recovered and are above the levels seen in Q3 2019. Footfall on retail shopping parks has recovered to 90% of the total in the same week in 2019; given increased online shopping and non-essential shops only reopened in mid-June, that is a remarkable figure. Similarly, light commercial and heavy goods vehicle traffic is back to the same level it was in February, before the COVID outbreak took hold.
How we physically interact, shop, entertain ourselves, conduct business, take holidays and educate our children have changed dramatically through force of circumstance. Our perception of the future, and how we plan for it, will almost certainly be transforming too; these are perhaps key themes that are likely to be reflected in stock market performance for the foreseeable future. But with Brexit uncertainty and a US election only weeks away, potential pitfalls remain. Even if a COVID vaccine is released early, that may not be a panacea for economic recovery. A recent Gallup poll of Americans found that 81% of Democrats are willing to be vaccinated today if a free and FDA-approved vaccine were available. That compares with 59% of independents and just under half of Republicans, 47%.
That translates to a third of Americans refusing to take a vaccine now even if it were free and approved. As my Mum used to say, "There's nowt so queer as folk..."