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WeekWatch – ‘Chancellor’s Winter Economy Plan’ September 2020

WeekWatch – ‘Chancellor’s Winter Economy Plan’ September 2020

There have been plenty of landmark political speeches in the past few months, and last week provided another big one. It came in the form of the chancellor’s Winter Economy Plan, which Rishi Sunak gave after the Treasury scrapped the usual Autumn Budget in favour of further special measures to deal with COVID-19.

The government’s goal is to reduce its spending on job support schemes while also limiting damage to jobs and the economy. The new measures will replace the previous furlough scheme – which is planned to wind up in October – with a wage subsidy scheme like the one that exists in Germany, which will continue to pay a portion of workers’ wages, but only if their employer is prepared to offer them at least a third of their typical hours. The impact on UK markets was muted, largely because the announcements had been floated unofficially in the press in the days running up to his speech.

Will it work? Some economists believe that the latest announcements will help to limit further economic damage to the UK. They “go some way to cushioning the blow to the economic recovery from the new restrictions to contain COVID-19 and limiting the long-term hit to unemployment”, suggested Capital Economics, but added that they “won’t eliminate the hit entirely”. They expect GDP to stagnate in the final three months of this year, and not return to its pre-crisis level until the end of 2022.

In Europe, stock markets slid last week as markets digested data on rising infection rates, plus slowing economic recoveries across the continent. The biggest fallers were companies that are more likely to lose out in the event of a downturn – like car manufacturers, airlines and banks. However, on Monday morning they rebounded.

Similarly, in the US, markets were down after the Chairman of the US central bank warned that Congress needs to agree soon on a new economic stimulus plan. Urging lawmakers to agree on a deal soon, he warned: “The economy is recovering robustly, but we are still in a deep hole.”

The deal has been stalled by disagreements in Washington. While they’re united on the need for further stimulus, Democrats and Republicans disagree over how big the package should be – and the lack of progress has been a heavy weight on investor sentiment recently. But there was cause for optimism last week after it emerged that the Democrats have begun a new proposal.

The upshot of all this is that investors can expect volatility to remain in equity markets. As the winter months approach, and with vaccines yet to emerge, markets are prone to ups and downs, noted Mark Dowding of BlueBay Asset Management, co-managers of the St. James’s Place Strategic Income fund.

“For now, it seems entirely plausible for stocks to rally or fall by 10% in the space of the coming week without very much ‘new news’ at all,” he said.

However, he adds that while the short-term outlook points to more volatility, the longer-term prospects for markets are brighter: “Ultimately, we believe that policy support and a better outlook in 2021 will mean that the current market correction does not extend too far.”

The first live debate between the two US presidential candidates is scheduled for this week. With the campaign trail rhetoric generating plenty of headlines and speculation, leading to market jitters, it’s easy for investors to feel that they have to respond to the latest news. However, it’s important to remember that the outcome of the contest isn’t inherently positive or negative for investors, if they think strategically, and for the long term.

“Although the market likes to focus on events like elections, political trends tend to play out over months and years. Politics can create short-term noise, but if you can withstand the volatility, it’s best to sit on your hands and wait for it to pass,” noted Johanna Kyrklund, Chief Investment Officer at Schroders and manager of the St. James’s Place Managed Growth fund.

“The more important topic for markets is COVID-19. The identity of the next US president is a sideshow in comparison.”

 

BlueBay and Schroders are fund managers for St. James’s Place.

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