At a time when the headlines in the popular press are, at times, in our opinion, sensationalist, we thought we would give you our view of the current economic and investment market picture. We do so with a major caveat, which we always try to ensure clients understand, we have no crystal ball, we cannot tell the future, nor will we be attempting to do so. But we can provide a sensible and measured view of where we are and the issues that we face.
So what of those headlines, there are many but two we have picked out are: “UK in historic recession”, “Housing Sales hit ten year high as mini boom accelerates”. These headlines were published in the same week and both are factual, both are correct, however in our opinion both have been written because of the sensationalist picture they paint in the readers eye and have little to do with the reality of where we are.
Taking the first headline about the UK entering into recession, of course this is true, based upon the Office of National Statistics data the article in question goes on to clarify that we are deemed to be in a recession when two consecutive quarters show negative growth in our Gross Domestic Product (GDP) and that the second quarter showed a contraction of 20.4% which is the sharpest decrease since records began in 1955. So technically the headline is correct, however, it does not take a financial genius to work out that when broadly the whole economy is closed down that this will have an impact upon the level of productivity within the UK and across the globe and it provides no real insight or helpful comment as to what this means.
The second article, may just show how confident the house buying population are in the thought that the economic impact of the recession will be short-lived and that it is almost artificial in nature, if the only thing that is “holding us back” is the Covid crisis and assuming we come through this, the economy will revert to a growth environment. Clearly, the UK government, in common with governments around the world have put in place a wide-ranging array of measures to prop up the economy, protect jobs and companies and to protect various sectors of the market, including the housing market. The recent increase in house sales and activity is almost certainly connected to the reduction in stamp duty, both for the investment buyer as well as the owner occupying market, but individuals will not usually commit to what is usually one of the largest financial commitments they will undertake in a period of significant uncertainty.
So what of the reality, well it is probably somewhere between what the two headlines would suggest, clearly our economy and the world economy is impacted by Covid, but governments around the world have responded by pumping massive sums into their economies to provide short term protection. The UK Government alone has committed £655bn to the economy, with a further £90bn budgeted, therefore the majority of the short term impact of effectively shutting down the economy has been averted, however as we emerge and try to get back working the real growth, which is returning will need to replace the government support, and we have started to see the impact through job losses in various parts of the economy, most notably in the retail and leisure sectors. There will undoubtedly be some winners and losers, as there always is and to some extent we are seeing an acceleration of themes that are already developing within the world’s economy. The so called FAANGM stocks (Facebook, Amazon, Apple, Netflix, Google, Microsoft) have driven the returns on the US stock market providing a return in the first half of 2020 of 26.8% compared to the return on the other 494 stocks in the index of -3%, this has seen their weighting within the S&P 500, the main US index, increase from approximately 18% to 24% of the index. IT has certainly seen significant gains as the business models have been able to take even greater advantage.
Meanwhile, in the UK our own FTSE 100 has lagged the recovery seen during the second quarter of the year, held back in particular by its exposure to the financial sector, the largest single constituent part which had a weighting of over 20% of the index pre Covid crisis it now makes up less than 17%.
The UK index has further been impacted by a strengthening currency against the dollar in particular, which has seen earnings, already suffering during the economic downturn being eroded still further when being converted back to sterling. Oil clearly has suffered as global demand reduced through the pandemic, whereas Gold and precious metals have produced spectacular returns. Interest rates are being maintained at virtually zero, with some stepping into negative territory. Perhaps another reason for a more buoyant residential property market, where debt is cheap and returns from cash holdings are negligible. It is clear the expectation is that interest rates are likely to remain low for a significant period of time to come.
So what next? Well clearly much of this will be dependent upon how we come out of the pandemic, the investment markets in general are suggesting a positive outcome; based in the main on the premise that governments around the world have been shown to be committed to do whatever is necessary, so even if there is a second spike, the thought is that government intervention and support will avoid any systemic issues. In the longer term, governments will need to replenish their own reserves, so higher taxes and potentially lower spending is likely to be the result, but not until the government can be confident a potentially fragile economy can sustain anything applied and there are still many of the issues that we have forgotten about such as Brexit, the US elections, trade tensions between the US and China, and we are sure there will be other issues that raise their heads over coming months. We believe that the most sensible strategy to adopt is to retain an appropriate cash reserve to meet unforeseen expenses and allow flexibility and to then adopt a strategy of investing in a wide range of holdings and assets that will prove to be resilient as a whole over the medium to long term, trying to be overly clever and predict the future or which assets will outperform and make large tactical changes can produce strong returns if the decisions are proven correct, however, with so many variables, some of which we may not even see, such as a pandemic outbreak, it is as likely that these decisions prove to be incorrect.