Market update from our co-CIO, Matthew Singleton
In my update last week, I mentioned that I was not surprised to see markets sell off a little after the previous 3 weeks of strong gains. I also mentioned that this week would be interesting to see how markets behave after a poor week. Would they sell of further or would they bounce back. Some investors would have been nervous that the downward momentum would continue, and reality would kick in regarding government debt and the current state of the economy. However, the market seems to want to continue to be forward thinking and betting against the central banks is potentially not the wisest move to make.
This week there have been 2 takeaways that have assisting the market moving back up which Mark touches on in his section of this newsletter (Additional stimulus and U.S. retail sales figures).
Major Market Movements Week to date.
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Thoughts and opinions of our co-CIO & Managing Director, Mark Parello.
This week has been all about two duelling narratives:
– Coronavirus second wave
– Massive government stimulus
Coronavirus second wave
This week I read China has imposed a travel ban in Beijing to stop the spread of a fresh coronavirus outbreak. Parts of Beijing are already back under lockdown and new travel restrictions have been reimposed on residents of areas considered high risk. There are also limits which have been introduced on public transport to reduce passenger numbers on busses and trains.
As well as halting domestic tourism, sporting events have also been suspended in the city, while plans to reopen schools for some students have been dropped.
Those deemed high-risk – now not allowed to leave the city – include people who have been in close contact with the confirmed cases.
Beijing had essentially eradicated local transmission of the virus, but in recent days has added 137 cases in the city of 20 million people.
In my opinion, the reason this is different to the first outbreak is the Chinese have acted immediately to contain the outbreak, and the track and trace system they have in place will make the ability to deal with any outbreak far more efficiently and effectively.
Massive government stimulus
Governments globally have pumped unprecedented levels of stimulus into the system and have pledged more than $8 trillion in stimulus worldwide in order to hold up their economies. Governments worldwide
The US economic response to coronavirus has been overwhelming. As well as the $3tn in fiscal stimulus that has been introduced so far, there has also been a massive injection of liquidity into the financial system by the Fed through purchases of treasury’s, corporate bond ETFs and now individual corporate bonds. On top of this President Trump is considering a $1tn infrastructure plan to help revive the economy.
The UK has also been spending big. The chancellor has already spent £133bn dealing with the economic fallout from Covid-19. He has however so far resisted calls for a big stimulus package of tax cuts and spending commitments, insisting the next full Budget should wait until autumn. This morning the Bank of England announced it has increased its QE programme to £300bn.
The struggle between these two duelling narratives is what is driving markets in the short term and will do until a vaccine is found. Based on what I have read and the conversations I have read, I take comfort in the governments approach. I also take comfort in seeing the results as economies open with employment numbers increasing more far quickly than expected. It was also reported this week US retail American shoppers returned in force in May, fuelling a record 17.7% monthly gain in retail spending. The rebound has partially made up for the losses, leaving spending down about 6% year-on-year.
Coming back to government stimulus though, the longer-term challenge is how do they repay all this debt.
They will likely do this in the following ways:
– Debt equity swaps in businesses and sell down gradually, as they did in the 2008 credit crisis with the “bad banks.”
– Increase taxation and reduce reliefs.
– Inflate the debt away. This is good for real assets – property and equities for example. This is also bad for cash on deposit.
Based on the above, the longer-term view will benefit those who are invested over those in cash, but this have always been the case. You can take comfort that your portfolio is well diversified and we are working our hardest to both preserve your capital and catch the upside when it comes.
As Jimmy Dean once said – “While we can’t change the direction of the wind, we can adjust our sails to always reach our destination.”
Thank you for taking your time for reading our newsletter.
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