Further to our previous updates please find below our latest commentary on the continued impacts of the Covid-19 virus on the investment markets and the wider economy, as of Monday 6th July 2020. We will continue to provide regular information and further observations to help support our clients.
Recent weeks have largely been trendless for investment markets with the FTSE 100 bouncing in the range of 6,100 to 6,300. Investor optimism has been fleeting, with a new reason seemingly daily as to why the recovery is intact, or why a second crash is imminent. On the positive side, examples include significant promise in the early stages of vaccine development, or promising jobs data on the positive side. On the negative side have been stories of resurgent infection numbers in southern US states and forecasts of ballooning public debt levels following Covid-19 rescue packages. On Monday 6th July there was a particularly novel cause for strong market performance, however; a front page editorial in a Chinese state owned newspaper talking up the prospects of a bull market and encouraging investors to jump on-board. This then led to the biggest jump in Chinese shares in more than a year and provided enough optimism for markets in other countries to join the party. A welcome gain in asset values of course, but it must be acknowledged that cheerleading is not the most sustainable of justifications for rising prices.
Not all Chinese action over the week has been welcomed, conversely. China’s new national security law came into force last week, with the result being that any dissent on Chinese rule of Hong Kong can now be heavily punished. The implications were obvious, with the leaders of Hong Kong’s independence movement quickly accepting defeat. From the UK’s perspective, this is a clear breach of the One Country, Two Systems approach that was promised at the point of handover from UK to Chinese rule. In response, as well as stern condemnation, the UK has offered a route to British citizenship for approximately three million Hong Kong residents. China’s response to this offer is to accuse the UK of “gross interference”.
This is important example of weakening global harmony, of which the UK is firmly part. Consider also the direction the UK government is taking with a banning of Huawei from the UK’s 5G network and a path of divergence appears set. A world away from 2015’s “Golden Age” of China-UK relations. While markets have largely shrugged their shoulders at this development, with the West increasingly turning their back on the World’s second largest economy, this is a topic that has the potential to cause large flashpoints in the coming years.
After months in the deepfreeze, the UK economy saw a major turning point on Saturday with the largest easing of restrictions so far. Data shows that the average household has been saving large sums over this period and now the opportunity to spend is returning. On the to-do lists of many over the weekend would have been a trip to the hairdresser and maybe a trip to the pub. Such consumer spending is going to be vital for our economic recovery. With social distancing measures in place, however, there will be major impediments to profits being delivered and pre-Covid activity levels will remain a long way off.
Rishi Sunak, Chancellor, must face this challenge. He is due to speak on Wednesday this week, and is expected to announce a range of support packages aimed at restoring economic confidence and encouraging spending. The focus appears to be on the young, who are expected to be the hardest hit financially by this crisis. Schemes aimed at delivering training and employment appear towards the top of the list, along with an expected VAT cut for the hospitality sector.
Also in the pipeline, apparently, is the prospect of stamp duty holiday, though this may not come until later this year. Aimed at enabling the young the join the housing ladder, an important side effect will be a recovery in house price growth throughout the housing market. While consumers are largely sitting on cash, they need confidence in the economy to part with their savings. For current homeowners, the feeling of prosperity which accompanies rising property values could well be the catalyst.
Our view continues to be that market conditions will remain highly fearful in the short term, however, there will come a point when sentiment will turn, when markets have fully priced in the economic pain to be caused. When this will occur still remains uncertain, but the time of growth will come again. We believe that over the medium term we can expect a reasonable recovery in terms of economic activity and stock market levels.
Our philosophy is that no one can predict the peaks and troughs of financial markets with any accuracy and it has always been extraordinarily difficult to time when the best (peaks) and worst (troughs) are. Timing the stock market is extremely difficult, so we believe it is best avoided. Volatility is a part of investing which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets. Taking a multi-asset approach means that some assets can fair better in different market conditions as they are more defensive assets such as bonds, whereas during periods of growth equities tend to fair better.
Armstrong Watson, in addition to our full range of accountancy services, also have access to fund management expertise from the Future Money asset management team, as well as independent expertise from the wider market. We are able to use this to help provide insight, commentary, advice and support to our financial planning and wealth management clients.
At the current time we continue to believe the appropriate course of action for most clients is patience. Some clients also continue to see this as an opportunity, with equities clearly still lower priced than they were at the start of the year, however, our philosophy remains that it is time in the market not timing the market, which is usually the best approach.
We also believe that for those people who are considering taking financial advice that now would be a good time to do so, whilst we know the current tax allowances, reliefs and opportunities that remain fully available for those in a position to utilise them.
For more information and guidance on Investing, please download our handy guide to Investing here.