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 Wednesday 12th August. We will continue to provide regular information and further observations to help support our clients.
After a 2.2% fall in Q1, a 20.4% fall in Q2 means the UK has now officially entered a recession. With such a dramatic drop in output, this is now the deepest recession since quarterly growth records began in 1955.
The economic pain has been worse than that experienced by the US and amongst the worst in Europe. The extent of the damage can be attributed to the length of our lockdown and on the dependence of our economy on the badly hit service sector. On the plus side, however, and the reason behind strong market movements on Wednesday was a sharp bounce back of 8.7% in June, above average expectations of 8.0%. Nonetheless, this still leaves a long way to go before full recovery.
While Q2 was the worst quarter on record, Q3 may well be the best quarter, with much of the missing spending from Q2 leading to pent up demand for when the ability to spend has returned. This is likely to mean that the recovery over the coming months will initially be sharp, but it must also be assumed it is likely to decelerate, as the job market looks set to worsen as the year goes on. ONS figures show that 730,000 jobs have been lost since the start of lockdown and with the ending of furlough scheduled for October (which, as at June was supporting the wages of 5m people in the employed sector alone), it seems likely that many more job losses will occur as companies are expected to stand on their own two feet.
The development of an effective and safe vaccine for Covid-19 is still the global dream currently, as immunity could allow close social interaction once more, permitting society and the economy to return to pre-crisis conditions.
High profile scientists are often reminding us that success in this search is not guaranteed and that even if a vaccine is developed, by itself it would unlikely be a panacea. However, that appears not to dent the growing confidence that one of the many treatments currently in development may prove successful.
Goldman Sachs has issued a forecast believing that US authorities will approve a vaccine by the end of 2020. Elsewhere, Russia now claims to have developed a successful vaccine, which it intends to rollout to its population. International scepticism of this has been high, with the belief that the drug has not yet been sufficiently tested. Yet, the confidence of Russia does seem to be impacting markets, with strong gains on the day of this announcement. This is a reminder that should an internationally recognised drug be approved, then markets are likely to experience a significant rally.
EU-UK trade negotiations have been out of the headlines recently, but with the next round of talks due next week, expect Brexit discussions to increase in volume once again.
In their absence though, we seemingly have had good progress in talks between the UK and Japan, being led on the UK side by Liz Truss, international trade secretary. Largely working from the blueprint of the EU-Japan free trade agreement, a quickly arranged deal is seen as achievable, although a last minute argument over Stilton may be proving an unexpected hurdle!
At a national economic level, a Japanese free trade deal may not be the most significant development, with the potential agreement expected to add only around 0.07% to Britain’s GDP (compare this with the expected 5% loss from our departure from the EU single market and customs union). However, it will be seen as important as an early win for our post-Brexit freedoms. What’s more, a deal with Japan is also seen as stepping stone to the greater prize of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a Japanese driven trade agreement which includes Japan, Australia, New Zealand, Canada, Mexico and Singapore, amongst others. If membership is achieved, this will be seen as a real prize of Brexit.
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.