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WeekWatch – ‘Social distancing measures have a particularly egregious financial impact’ June 2020

WeekWatch – ‘Social distancing measures have a particularly egregious financial impact’ June 2020

Simeon Stylites the Elder knew a thing or two about social distancing. In the fifth century, he set up home on a wicker platform at the top of a Syrian pillar, and thus the saint lived out his remaining 37 years. Food was delivered by basket, and a drain ran down the pillar’s core; his final pillar, on which Simeon died, was reportedly 15 metres high. Today, only a stump remains (see image).

Contemporary social distancing measures are less ambitious, but debate over them intensified last week. The UK’s two-metre rule makes it a relative outlier: the US minimum is set at 1.8 metres; Germany, Austria and Italy’s at 1.5 metres; China, France, Singapore and Denmark’s at just one. After complaints by shopkeepers and restaurateurs, the UK chancellor is considering the economic impact – a reduction may be announced this week.

Social distancing measures have a particularly egregious financial impact on high-volume outlets like Primark and TKMaxx – UK investors, take note.

“Food and convenience-style retailers located within the kind of retail park environments that are typically owned by St. James’s Place funds benefit from plenty of external space to accommodate social distancing and free car parking which makes it easy for consumers to visit to shop for essentials and perhaps ‘collect having clicked’,” said Philip Gadsden of Orchard Street, manager of the St. James’s Place Property fund. “Evidence suggests that consumers often buy more goods when they visit a shop to collect goods ordered online, making a win-win for the retailer because no home delivery cost needs to be funded, and they sell a bit more from the physical store during each collecting visit.”

In many ways, lockdown has accelerated existing business trends, like the shifts to a greener model and to online shopping. Could any retail majors benefit from the new normal?

“The high street will continue to be impacted by COVID-19, but Next will be a winner in the process,” said Luke Chappell, head of UK Equity at BlackRock and manager of the St. James’s Place UK & General Progressive fund. “I’ve met with [CEO] Simon Wolfson around 50 times in the 20 years I’ve held the stock, and the management team has been very thoughtful [in] repositioning the business away from reliance on the high street towards online, which is about two thirds of the profits – or more like 100% this year.”

The shift, however, may bring not just a reduction in floorspace but in employee numbers, too. Data last week showed that 612,000 UK employees lost their jobs between March and May, the sharpest quarterly increase since 2001. The Bank of England duly stepped in with a promise of support last week, saying it will raise its bond-buying plans by £100 billion, taking its total stock of asset.

purchases to £745 billion. UK public debt, meanwhile, last week struck 100% of GDP (see In The Picture).

In Frankfurt, the ECB’s balance sheet is approaching €6 trillion. It reported on Thursday that 742 European banks had applied to borrow €1.3 trillion under its principal refinancing scheme. With some rates as low as -1%, it’s not hard to see why. On Friday, the ECB said the eurozone economy would contract around 13% in the second quarter, but the disagreement with Germany over bond refinancing continued. Both the FTSE 100 and EURO STOXX 50 rose over the week. Notably, as of this year, Shell is no longer the biggest or even second-biggest listed European company. Those accolades now go to Unilever and AstraZeneca; the latter, a healthcare major, employs 46% of its staff in Europe.

“There are times when the UK market misses some of the big NASDAQ technology names like Zoom,” said BlackRock’s Chappell. “It’s striking that just about the largest company by market cap today is AstraZeneca, and it is still growing its top line with double-digit growth. We may not have the US West Coast companies, but, if you look hard enough, we still have some great companies in the UK.”

Among the countries to have quashed the virus successfully, many analysts highlight the performace of China (albeit after a hesitant start) and of Japan. Numbers on the Tokyo underground are now recovering, but the economy minister warned last week that “we’re not at a stage yet where we want to stimulate consumption and encourage people to travel a lot”. The Bank of Japan, meanwhile, has had a relatively quiet lockdown in terms of the scale of its support.

In China, the economic indicators are encouraging; coal consumption and services sector data suggest GDP growth is healthy, while unemployment has started to fall. Global companies with exposure to China are outperforming on markets, and Chinese stocks are now positive for the year. Both the CSI 300 and Japan’s TOPIX rose last week.

“Recent activity, spending and labour market data [mean] … we are revising up our growth forecasts for the next few quarters because the economy is starting from a stronger position,” said Capital Economics. “We now expect the level of output to return to its pre-virus trend around the end of this year rather than the middle of 2021.”

But the fresh virus outbreak in Beijing has unnerved the administration and led to tighter controls in the capital. Moreover, politics across Asia is increasingly fraught. Last week, North Korea blew up the South’s de facto ‘embassy’ and demonstrators in India burnt Chinese flags over Kashmir.

In US markets, meanwhile, animal spirits have returned, and the S&P 500 had another positive week, putting the index on track for its best quarter in 20 years. Economic data certainly helped: the Citi US Economic Surprise Index (which measures the disparity between indicators and expectations) struck a new high; US retail sales saw their sharpest month-on-month improvement (17.7%); and industrial production, and US consumer, investment and jobs sentiment all rose. Fed largesse helps too – Morgan Stanley forecast that the Fed’s balance sheet will exceed $10 trillion by the end of 2020.

Meanwhile, the US president and Joe Biden, the Democrat nominee, each began their campaigns, but in very distinct modes. The (mask-less) president, always in his element on the campaign trail, spoke to an auditorium of supporters in Tulsa, Florida. Joe Biden, meanwhile, wore a mask and ensured that everyone present kept their social distance. No pillars, but Saint Simeon Stylites would surely have approved.

BlackRock and Orchard Street are fund managers for St. James’s Place

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