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Across the world the policy response to the economic cost of covid-19 lockdowns has been vast in scale, with unprecedented action taken in many areas. Amongst western developed nations particularly there have been hitherto almost unbelievable levels of support offered. But not all regions have been as forthcoming.
While the European Central Bank was very quick to act in support of the European economy unleashing all the monetary policy tools at its disposal, on the fiscal side there is a lack of coordination that may prove damaging for the long term growth prospects of the European economy.
Individual European countries have taken stimulatory action to support their domestic economies. Yet, countries such as Italy, who have been particularly hard hit by the virus, and whose public finances were already in a difficult state, find themselves in a position where they are unable to afford the recovery support packages that will be vital to their long term health. In normal circumstances, a country facing such a problem would see the value of its currency fall, making their exports cheaper, which in turn acts as an economic automatic stabiliser. But, with the restrictions of a relatively strong Euro, this boost is unavailable to Italy. This is a major cost of Eurozone membership and is a major reason why, Italy, together with other poorer southern European nations are upset at a lack of solidarity being offered by the wealthier, northern European nations.
While politically integrated regions such as the United States and the United Kingdom were very quick to launch extreme levels of fiscal support to their economies, Europe is working towards this position at a tortuously slow pace. In recent weeks European leaders have been working towards a bailout fund which would help support the economic recovery of the hardest hit nations.
While all countries are in agreement that more needs to be done, disagreements over the shape of that help are significant. On one hand, the likes of Italy believe that a series of non-refundable grants are required to help them grow without further adding to their public debt. On the other hand, the more frugal nations demand that assistance is only offered in the form of loans. Progress towards grants is being made with both France and Germany now backing the idea, but in anticipation of European Commission president Ursula von der Lyon’s plan along these lines, the Netherlands, Austria, Denmark and Sweden have outlined their resistance. While there remains room for compromise, with the approval of all 27 EU members needed for a recovery fund, there are no guarantees support will be coming anytime soon. In the meantime, while discussions drag on, Italy faces a daunting future, uncertain of what support will be coming and of how to position its economy for recovery from this great challenge.
So far in this crisis, US stock markets have been the most resilient of global markets, while the UK has performed relatively weakly. With a large concentration in more cyclical sectors, British stocks have fared poorly compared to the technology giants of America, whose strength and reliability in earnings gives them a robustness well valued by investors at times of crisis. Consequently these companies performed well during the falling markets of February and March. Yet, through the stock market recovery of April and May these firms have continued to perform well, leading to continued strength from US markets overall. While perhaps surprising at the headline level, these trends should be examined in further detail.
The stock market gains since early March have been in no small part assisted by the huge levels of stimulus that have been pumped into the global economy. While this wall of money has boosted confidence that economies will be supported until natural economic growth returns, that recovery point is not yet here, with large chunks of the global economy still either locked down or facing extremely suppressed operations.
As such, in our view, it appears there will be two phases to the stock market recovery; although this may well become multi-phase given the very real possibility of further virus outbreaks leading to resurgence in fear. In the absence of such a fall, nonetheless, it appears likely we are in the first phase of recovery. Those companies who were previously performing well will continue to prosper as their economic survival looks more certain and they are benefitting from investors looking for somewhere to invest. A recovery in the more sensitive areas of the economy, however, looks set to be delayed until we reach a second phase, likely when figures actually show the economic recovery is in place. At this point, the more cyclical areas, such as consumer discretionary, energy and financial sectors are likely to be amongst the biggest beneficiaries. Once this point is reached then we would expect those countries with higher exposure to economically sensitive sectors, such as the UK, to perform relatively well.
We also believe that for those people who are considering taking financial advice we would suggest that now would be a good time to do so, whilst we definitely know the current tax allowances, reliefs and opportunities remain fully available.
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If you would like to discuss your investment portfolio following the Covid-19 outbreak, please speak with one of our Financial Planning Consultants on 0808 144 5575 or email Covid19help@armstrongwatson.co.uk.Email us
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