Lockdown’s multiple social implications continued to be felt in earnest last week. On Thursday, Turks should have been celebrating the 100th anniversary of the founding of Turkey’s parliament. The very same day, the English should have been celebrating both the birth of William Shakespeare and St. George’s Day. Of course, old St. George wasn’t from England but Turkey (as it is now called), where he would die in the year 303. Since then, his reputation has only grown; by the 11th century, George had become a dragon-slayer.
Dragons may be thin on the ground these days, but myths are alive and well. At a press conference on St George’s Day, Donald Trump floated the idea of injecting carriers of the COVID-19 virus with disinfectant. He also suggested the targeted use of ultraviolet light. Elsewhere, rumours about 5G masts causing the virus continued to circulate, leading to the vandalisation of several masts in the UK, including one relied upon Nightingale Hospital, London.
But who needs myths when the facts themselves are so extraordinary?
Last week’s headline number was perhaps -$36.73 – the price to which a barrel of oil fell (on the futures market) last Monday. Oil faces particularly perilous headwinds at the moment, as lockdown measures have not only cut immediate consumption, but also pushed reserves to full capacity. As a result, even when markets recover, there may well be a time lag for any oil sector recovery. However, Shell and BP both recovered and actually ended up for the week, cutting back the FTSE 100’s losses for the period.
And then there’s the extra impetus that the lockdown has provided for companies, governments and civil services to make themselves less reliant on commuting and business trips; several cities are using the lockdown opportunity to pedestrianise their centres. Who’s to say they will merely return to old norms when lockdown ends, and that the investing world won’t, in a similar vein, prioritise environmental, social and corporate governance (ESG) factors even more post-lockdown?
“The market correction has meant investors with a bias towards ESG have benefited, as companies with good ESG credentials tend to be higher quality,” said Johanna Kyrklund of Schroders. “But it’s also a long-term trend that we expect to remain in place.”
More immediately, however, the focus is the broader economy. The oil price used to be called the most important number in the world. The Fed funds rate may tend to be more closely watched these days; all the same, the centrality of oil to the global economy remains. Is there a risk of financial contagion as a falling oil price pulls down the broader market?
“I am not so worried about the risk of contagion,” said Howard Marks of Oaktree Capital, co-manager of the St. James’s Place International Corporate Bond fund. “Some market commentators are suggesting that the collapse of the oil price is a terrible problem for the economy. I don’t see it that way. If you think about it, it’s a zero-sum game, with winners and losers. Clearly, it is a major problem for the oil industry and those that are tied to it. But, ultimately, the lower price of oil is great news for consumers of oil. Airlines and cruise operators don’t have much to smile about right now, but it’s positive for them. And a lower price of fuel means consumers everywhere will have more money to spend on other things. I don’t see the problems in the energy sector spreading elsewhere.”
The S&P 500 had a marginally negative week, held down by the oil news; but its bigger test probably comes in the week ahead, when tech’s ‘big 5’ will report results – the five account for 20% of the index. Other indicators told grim tales, however, among them news that 4.4 million further Americans sought unemployment benefits last week, bringing total claims for the past five weeks to more than 26 million. The US labour market will not be able to turn to immigrant workers for the foreseeable future, as the president last week declared an immigration ban.
Bloomberg’s weekly consumer sentiment index for the US continued to decline last week, although has yet to plumb to the lows reached during the global financial crisis. US services sector indicators were particularly ugly. Moreover, surveys showed that, even if lockdown measures were lifted, just 48% of respondents would return to public places (including factories and offices). Such sentiment wasn’t enough to prevent the governor of Georgia (named after a George II, not the saint) announcing that the state would open up once again, formally ending the lockdown.
In the UK, the CBI warned of a “race against time” to prevent firms collapsing, while indicators showed UK factory sentiment at its lowest since records began in 1958; manufacturing PMIs sunk to their lowest since records began 28 years ago. Services PMIs were worse, slumping from 34.5 (where 50 indicates no change) to just 12.3. The Composite PMI reached a new low of 12.9 in April, even lower than in the eurozone (13.5).
“On past form, the UK PMI survey is consistent with GDP contracting by at least 6% month-on-month in April, far sharper than any of the monthly falls seen during the global financial crisis,” said Ruth Gregory, Senior UK Economist at Capital Economics. “The PMIs … do not cover the retail sector. We think that the actual fall in GDP in April may be nearer to 20% month on month and that for as long as the lockdown is in place, output will be about 25% below its normal level.”
In the eurozone, however, the challenge is political, too, with the virus making an integrated European economic system increasingly subject to doubt, at least as far as borders and markets are concerned. The agricultural industry, for example, has been reorganised since the virus – and now looks largely to local labour. Will it ever revert?
China is, of course, further through the course of the virus. However, there is plenty of recovering to be done, not least in financial markets. International investors sold some $29 billion of Chinese equities in March.
China faces increasingly loud criticism from foreign governments over conditions in its food markets but also over its broader behaviour through the crisis. The US State Department last week criticised Beijing for increasingly assertive and aggressive regional policies during the virus outbreak.
Actions include more naval patrols in contested seas, fresh arrests (last week) of democracy activists in Hong Kong. (Virus policies are affected too: at one recent meeting of the WHO, Chinese representatives refused to allow Taiwanese representatives to describe Taiwan’s experience of the virus, on the basis that Beijing speaks for Taiwan.)
In fact, domestic popularity is probably the Communist Party’s greatest focus just now. Persuading people back into public places (and to spend money) is certainly getting a push from Beijing; last week, Communist Party officials were being ordered to make themselves seen – out shopping.
Oaktree and Schroders are fund managers for St. James’s Place.
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