WeekWatch – ‘Investor sentiment remains buoyant’ July 2020
A popular rumour in the early days of the COVID-19 crisis was that the virus couldn’t survive in direct sunlight. An odd coincidence, then, that the Sunshine State is among a number of US states reporting notable increases in new cases.
More cases in Florida, as well as Texas, California, and Arizona among others, placed some downward pressure on markets last week, with the S&P 500 relatively flat throughout the week. There was increased movement into less risky assets, such as sovereign debt, leading to high demand for US Treasuries. The price of gold, a ‘safe haven’ asset, hit a nine-year high last week, reaching $1,800 per troy ounce for the first time since 2011.
However, investor sentiment remains buoyant. Even though deaths and case numbers are rising, new cases appeared to have peaked in Arizona by the end of the week, noted Pantheon Macroeconomics on Friday. There are hopes that the rate of increase in the US, while alarming, might stay lower than it was when COVID-19 first struck, due to behavioural changes and lockdown-type restrictions in some states.
The creation of a vaccine or treatment appears increasingly likely, noted Lew Sanders of Sanders Capital, recently appointed co-manager of the St. James’s Place Global Value fund. If introduced in a timely fashion, such treatments would mean that much of this year’s economic damage could be repaired in 2021, with government interventions having played a crucial supporting role in the interim.
Sanders adds that active fund management allows for opportunities in times of uncertainty: “Anxiety is the source of opportunity. It’s what actually spawns high expected returns, and settings like this produce quite a lot of it.”
The picture was decidedly more optimistic in China, where equities recorded large gains throughout the week, before falling on Friday. The Shanghai Composite rose 10% between Monday and Wednesday, and China’s currency, the renminbi, also strengthened against the dollar following data suggesting that its economy is recovering.
Sentiment was mixed in Europe, where on Tuesday the European Commission warned that the economic fallout from COVID-19 will be worse than feared. Lowering its growth forecasts for the EU this year, it now expects the bloc’s GDP to shrink by 8.3% this year, worse than its previous estimate of 7.4%. It also expects a smaller recovery in 2021.
“Lower growth forecasts due to COVID-19 should not surprise,” argues Ken Hsia from Ninety One, manager of the St. James’s Place Continental European fund, adding that positive data is beginning to emerge from Europe as lockdowns ease and government support packages kick in.
COVID-19 case numbers, discussions around the EU recovery fund, and upcoming quarterly announcements from companies, will all affect European markets in the coming weeks, he says.
He adds: “Overall we believe that Europe’s actions against COVID-19 are reasonable compared to other parts of the world. This should mean that further risk is mitigated, and COVID-19 risk should be behind us before long.”
Meanwhile, Boohoo Group came under scrutiny last week. Founded in 2006, the online group successfully targets the youth market with affordable clothing, reaching 12-month sales of over £1 billion in 2019.
But a Sunday Times investigation alleges that its supply chain included UK factories where workers earned less than the minimum wage, and where social distancing requirements were not adhered to. Cramped working conditions in the Leicester factories were linked to a spike in COVID-19 cases and a local lockdown of the city. Its share price dropped on the news (but recovered later in the week), while major retailers suspended the sale of its items.
The fallout demonstrates what can happen when companies fall foul of environmental, social and governance (ESG) concerns. Whether Boohoo Group bounces back, or whether it faces longer-term problems, the story should serve as a cautionary tale for companies and investors alike.
Finally, on Wednesday, UK Chancellor Rishi Sunak unveiled a further stimulus package designed to support jobs and boost confidence. Markets responded well to the news, although job losses announced at Boots and John Lewis the next day pointed to the dangers ahead. The coming months will force politicians, businesses and investors to start thinking about how the UK will deal with higher levels of public debt.
“The time to pay for all this will come. But not this year and not next. Our capacity to do so will depend above all on how the economy recovers,” said Paul Johnson, Director at the Institute for Fiscal Studies. He added: “Let’s hold in the back of our minds that a reckoning, in the form of higher taxes, will come eventually.”
Sanders Capital and Ninety One are fund managers for St. James’s Place.
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