As lockdown restrictions gradually ease, the public mood appears to be shifting, with a more positive atmosphere returning this summer. This is unsurprising, as there is much to be positive about in the weeks and months to come. Crowds are set to return to theatres and music venues, the Chelsea Flower Show will be going ahead, and sports fans are excited to be returning to events and fixtures.
A faster than expected recovery – This renewed sense of optimism also extends to the economy, with data for H1 2021 demonstrating a stronger economic performance than previously anticipated. Due to this, it is looking likely that major economies across the globe are on track to return to near pre-pandemic conditions before 2021 is over.
Global economic growth projections strengthened – This improved outlook has caused many internationally renowned forecasting agencies to strengthen their projections for worldwide growth over the past few months. The latest World Economic A summer of hope
Situation and Prospects Report published by the UN, for instance, bumped its annual growth forecast up to 5.4% – a significantly higher figure than its previous estimate of 4.7% in January. For the most part, this positivity is reflective of the speedy rollout of vaccination programmes in economies such as the US and China, in addition to increased global trade.
Uneven prospects – However, a vaccine-driven recovery is creating inequalities, with a lack of vaccine availability in some countries threatening a broader global recovery. The UN warned that ‘the economic outlook for the countries in South Asia, sub-Saharan Africa and Latin America and the Caribbean remains fragile and uncertain.’
The future’s bright – While the future is looking much brighter as we advance further into 2021, the UN forecast (and subsequent warnings)
highlight the continued impact of the pandemic on economic prospects. That is why taking professional advice continues to be vital to investment success. We can help you take full advantage of any investment opportunities that arise.
This prospect is making capital markets excited. For most of the year, a dreary economic outlook (and drearier virus crisis) meant investors held some scepticism on European equities, even if this year they have traded level with their US counterparts. Low growth expectations, coupled with continued European Central Bank (ECB) buying, were an anchor on government bond yields, which stayed down at historically low levels, even as the US saw a pick-up. But with hope now on the horizon, bond yields are on the up. Germany’s ten-year debt yields rose temporarily to their highest level since 2019 – almost touching the 0% mark at one point – while yields in all other major European Union (EU) economies remain positive.
Bonds are being pushed by rising inflation expectations, with Eurozone five-year forward inflation swaps (a measure of long-term price expectations) at their highest levels since late 2018. Crucially, rising yields do not seem to be overly worrying the ECB. This marks a big change from just a couple of months ago, when a move up in Eurozone yields led to damage control. Policymakers warned against tightening financial conditions, and announced emergency bond purchases would be at a “significantly higher pace than during the first months of this year”. It appears those words did the trick – purchases remained ongoing but not necessarily in greater amounts.
That the ECB seems rather nonchalant this time round is significant. It suggests officials think the recovery is real, and that the Eurozone economy is strong enough to withstand a move higher in bond yields. This is understandable, given where the market moves are coming from. In February, soaring US growth expectations pushed bond yields up around the world – even though regions including the EU were still languishing. This time, expansion hopes fanning inflation expectations are coming from Europe itself.
The US comparison is interesting from a market perspective. The world’s largest economy has undoubtedly been the strongest this year, with a rapid vaccine rollout and significant fiscal stimulus exciting global investors. However the latest data shows a plateau in that rampant growth. And, while activity is stabilising at a decent level, the hype around American assets has been so great this year that there is not much room to budge higher. Europe, on the other hand, has occupied the other end of the spectrum – severe restrictions and the very public vaccine fiasco painted a rather dark picture. But now things are ramping up, markets are shifting focus.
That shift has obvious benefits for European assets, but also shines a light on issues that were best left forgotten. Hand-wringing over the European recovery fund – a hard-fought fiscal package for all EU members – had investors sweating earlier in the year. And, even though political problems there have dialled back, there is yet again more focus on EU’s perennial problem child: Italy. The EU’s third-largest economy has a host of long-standing problems that have been brushed under the rug by the pandemic. Its banking sector has struggled under a raft of non-performing loans since the financial crisis (even if some progress has been made), while its old fashioned and complex legal system has long been a barrier for investment. These structural problems are one of the main factors behind Italy experiencing more than a decade of low growth and disinflation – further compounding its debt issues.
The situation may be worsened by Brussels’ strict budgetary rules, though any spending is only likely to bear lasting fruit if accompanied by structural reforms. The malaise has been a repeated site of political tension, with populists gaining popularity in Italy and getting into regular spats with eurocrats. The script is always the same: tensions flare between Rome and Brussels; fears of a Eurozone breakup rise; officials find some way of kicking the can down the road; and repeat.
Markets were happy earlier in the year when technocrat and former ECB governor Mario Draghi assumed Italy’s premiership after the fall of a fractious government featuring the far-right Lega Nord party. Draghi commands financial expertise and significant respect in Brussels, so markets hoped his technocratic unity government could find a way out of trouble. Reality is always more difficult.
While Draghi is popular among international investors, he still has a deficit with the Italian population, simply because he was not elected to office. Moreover, even if he manages to last until Italy’s next scheduled election in 2023, it would be a tall order to solve the country’s structural problems by then. According to latest reports, Italy’s President, Sergio Mattarella, said that he plans to retire next year. Lega Nord leader and former deputy prime minister Matteo Salvini was quick to suggest Draghi as the president’s successor. If that happens, Draghi will have to relinquish the premiership, likely triggering an election that Salvini stands a good chance of winning. Nothing has been decided and opinions on the actual outcome vary, but already this is a scenario keeping observers occupied.
Any political uncertainty would certainly be a headache for capital markets – potentially dampening the outlook for the wider Eurozone as it dampens hopes for structural reform. With that issue on the horizon, investors may start to wonder what the Eurozone looks like once the ECB starts buying fewer securities – which for now has kept Italy’s yield spread versus the German bund very tight and therefore far less burdensome than it had been at times in the past. For now, we can at least take comfort that these problems are coming from a place of strength.
CEO Tatton Investment Management Limited
CIO Tatton Asset Management
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Chancellor of the Exchequer, Rishi Sunak, delivered his second Budget on 3 March declaring that “we will recover”. The key fiscal event, which had been delayed from the Autumn due to the pandemic, centred on a £65bn three-part plan designed to continue supporting British people and businesses through the pandemic, ‘fix’ the public finances once recovery begins and lay the foundations for the future economy.
The Chancellor began his statement by revealing the latest forecasts produced by the Office for Budget Responsibility (OBR) which provide hope of “a swifter and more sustained economic recovery” than previously expected. The economy is now forecast to grow by 4% this year and by 7.3% in 2022, which means it will regain its pre-pandemic level by the end of Q2 2022, six months earlier than November’s forecast implied.
In terms of public finances, the OBR expects government borrowing to rise to a peacetime record of £355bn in 2020/21 in order to fund the government’s economic support measures. As the economy reopens and emergency fiscal support is withdrawn, borrowing is forecast to fall back to £234bn in 2021/22. The Chancellor did not set any new fiscal targets in this Budget, though he did acknowledge that tax rises would be needed in the coming years to help repair the public finances.
COVID-19 Support Measures
Prior to Budget day, Mr Sunak had already announced a number of coronavirus support measures including an extension to the Coronavirus Job Retention Scheme, further support for a greater proportion of self-employed workers and details of the Restart Grant and traineeship schemes. During his speech, Mr Sunak reiterated that he “will continue doing whatever it takes to support the British people and businesses through this moment of crisis”, before confirming details of the various initiatives that will see total fiscal support rise to over £407bn:
• The furlough scheme will continue until September with no change to employee terms, although in July businesses will be asked for a 10% contribution rising to 20% in August and September
• The Self-Employment Income Support Scheme will pay a fourth and a fifth grant, which will potentially be available to an additional 600,000 self-employed people
• The Universal Credit £20 per week uplift has been extended for a further six months
• A new Recovery Loan Scheme will replace existing government-backed schemes at the end of this month offering an 80% government guarantee on SME loans of between £25,000 and £10m
• The business rates holiday in England has been extended until the end of June with a two-thirds discount then available across the rest of this year
• £126m of new money will enable 40,000 more traineeships, with cash incentives for firms taking on an apprentice doubling to £3,000
• The 5% reduced rate of VAT for tourism and hospitality sectors has been extended until the end of September followed by an interim rate of 12.5% for a further six months
• A £5bn Restart Grant scheme will provide grants of up to £18,000 for high street businesses.
Personal Taxation, Wages and Pensions
The Chancellor will freeze personal tax thresholds and increase tax rates on corporate profits in a policy he says is “progressive and fair.”
From April, the Personal Allowance will rise with inflation as planned, to £12,570, before 20% Income Tax becomes payable. The Income Tax higher rate threshold, at which people start to pay tax at 40% will rise to £50,270. Both thresholds will remain at these levels until April 2026 (rates and thresholds may differ for taxpayers in parts of the UK where Income Tax is devolved). As previously announced, the National Insurance threshold will rise to £9,568 from April and the Upper Earnings Limit will be £50,270.
Looking at Inheritance Tax, the nil-rate bands will remain at existing levels until April 2026: £325,000 nil-rate band, £175,000 residence nil-rate band with taper starting at £2m.
The 2021/22 tax year ISA (Individual Savings Account) allowance will remain at £20,000. The JISA (Junior Individual Savings Account) allowance and Child Trust Fund annual subscription limit will stay at £9,000.
The Capital Gains Tax annual exemption will also remain frozen at £12,300 for individuals, personal representatives and some types of trusts, and £6,150 for most trusts.
The National Living Wage will rise to £8.91 per hour and for the first time will include those aged 23 and over. The Lifetime Allowance for pensions will stay at its current level of £1,073,100 until April 2026. As previously pledged, the new single-tier State Pension will increase from £175.20 a week to £179.60 in April 2021. The older basic State Pension will increase from £134.25 to £137.60 per week. The rise is the result of the triple-lock system, whereby the State Pension rises in line with CPI inflation, average earnings, or 2.5%, whichever is the highest. For this year, the increase is 2.5%.
In 2023, the main rate of Corporation Tax, paid on company profits, will increase to 25%. Businesses with profits of £50,000 or less will continue to be taxed at 19%. A tapered rate will also be introduced for profits above £50,000, so that only businesses with profits of £250,000 or more will be taxed at the full 25% rate. A temporary super-deduction tax incentive will cut companies’ tax bills by some 25p for every £1 they invest, by providing allowances of 130% on qualifying investment in new plant and machinery.
A three-month extension to the temporary Stamp Duty Land Tax ‘holiday’ in England and Northern Ireland was announced, with the £500,000 threshold at which SDLT starts to apply now set to end on 30 June. A threshold of £250,000 applies for a further three months, with the regular £125,000 threshold returning from 1 October 2021.
The Chancellor introduced a new mortgage guarantee scheme. From April, the government will provide guarantees to UK lenders who offer mortgages to buyers to secure a loan with a 5% deposit on a property of up to £600,000 up to 31 December 2022.
Environment and ‘Help to Grow’ Initiatives
Mr Sunak outlined his plans for Britain’s “future economy”, with a “commitment to green growth” at its heart. He announced:
The UK’s first Infrastructure Bank, based in Leeds, with an initial capitalisation of £12bn, it will invest in green projects across the UK
New funding for offshore wind infrastructure in Teesside and the Humber
A new NS&I retail ‘green’ savings product
An updated monetary policy remit for the Bank of England, reinforcing the importance of environmental sustainability and the transition to net zero
Support for the development of new solutions to cut carbon emissions
At least £15bn of green gilt issuance in the coming financial year.
Skills training for small businesses is also part of the future economy, Mr Sunak said, announcing a £520m ‘Help to Grow’ scheme that includes:
Help to Grow: Digital – offers SMEs free online advice and a 50% discount on productivity-enhancing software (up to the value of £5,000)
Help to Grow: Management – offers access to a 12-week training course with leading business schools, which is 90% government subsidised.
Other key points
* The establishment of eight new freeports in England
* As previously announced, an extra £1.7bn will be allocated to help the government reach its vaccination target of offering a first dose to every adult by 31 July
* £400m to help young people catch up on lost learning
* £700m to support the UK’s arts, culture and sporting institutions as they reopen
* £150m to help communities take ownership of pubs, theatres, shops, or local sports clubs at risk of loss
* Over £1bn was announced for 45 new Town Deals across England
* Increased funding for the devolved administrations; £1.2bn for the Scottish government; £740m for the Welsh government; and £410m for the Northern Ireland Executive
* Fuel duty and alcohol duty frozen
* An extra £19m was pledged for domestic violence programmes
* An additional £10m to the Armed Forces Covenant Fund Trust, to support veterans with mental health issues (2021/22)
* Contactless payment card limit increased to £100 for a single transaction and cumulative contactless payments up to £300, the new limits will be implemented later in 2021
* Air Passenger Duty rates will increase in line with RPI from April 2022
* Company vehicles – fuel benefit charges and the van benefit charge will increase in line with CPI from 6 April 2021
* VAT registration and deregistration thresholds will not change for a further period of two years from 1 April 2022
* Taxpayer Protection Taskforce is being established, costing over £100m to combat fraud within COVID-19 support packages
* City and Growth Deals – over the next five years £84.5m in funding will be brought forward to speed up investment in local economic priorities
* £375m for a new Future Fund: Breakthrough scheme, facilitating investment in high-growth, innovative UK firms
* The government is launching the prospectus for the £4.8bn Levelling Up Fund
* The symmetric inflation target of 2% for the 12-month increase in the CPI measure of inflation will remain in place for the financial year 2021/22.
The Chancellor signed off saying, “An important moment is upon us. A moment of challenge and of change. Of difficulties, yes, but of possibilities too. This is a Budget that meets that moment.”
It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.
All details are correct at the time of writing (3 March 2021)
Our vulnerabilities have been laid bare over the last year, as the pandemic took hold of all our lives, and continues to present challenges on a variety of levels. Economic frailties have been exposed but, as we enter 2021, hope hangs in the air with the prospect of recovery in the New Year and beyond.
Slowly but surely
A fitting portrayal of the situation was coined in the International Monetary Fund’s (IMF) final 2020 assessment of global economic prospects, entitled ‘A Long and Difficult Ascent’. The Fund predicts a moderate rebound this year with a continuing gradual recovery over the following few years, with the economic path ahead remaining challenging.
Reasons for optimism
Although the IMF forecast highlights ongoing uncertainties and risks, primarily centring on the future path of the pandemic, there are reasons for cautious optimism. Continuing progress in the rollout of vaccination programmes and the economic stimuli promised by Joe Biden, should both have a positive impact on market sentiment throughout the course of the year.
The linchpin to successful investing, whatever the future holds, inexorably remains embracing a long-term philosophy, based on sound financial planning principles. Maintaining a diversified investment portfolio which suits your attitude to risk and resisting any urge to panic trade, are essential elements. Looking forwards and focusing on future key trends and longer-term investment themes will stand us all in good stead too.
Advice reigns supreme
Given the heightened uncertainty and market turbulence, it has arguably never been more important to obtain professional financial advice. We can construct a tailored plan, setting out realistic and achievable financial goals, and help you navigate the challenges and opportunities that lie ahead as the New Year unfurls.
The ‘scientific cavalry’, as Boris Johnson likes to put it, has arrived. The UK became the first western country to implement a COVID vaccine for mass use, and authorities are wasting no time rolling it out. 800,000 doses of Pfizer and BioNTech’s celebrated vaccine are expected to be started, with the world’s first, 91 year old Margaret Keenan, gaining world wide media coverage. The most vulnerable are first, before the remaining 40 million ordered doses are injected into the population over the next year. The government’s scientific advisers stress that the virus is still ever-present, and restrictions will have to remain tight for several months, although the UK’s Deputy Chief Medical Officer, Professor Van-Tam also said that once all on the priority list had been vaccinated (over 50s and vulnerable groups), 99% of fatalities could be prevented. News of the vaccine roll-out undoubtedly brings respite, and hope that Britain’s epidemic will fade as the winter months do.
The good news was certainly needed. Along with being one of the worst-hit countries in the world in virus terms, Britain’s economy has shrunk by the biggest margin in the G7. And, according to the latest report published by the Organisation for Economic Co-operation and Development (OECD), things are hardly looking up from here. By the end of 2021, the only major economy expected to have worse growth numbers is Argentina. OECD forecasters expect Britain’s economy to be 6% smaller at the end of 2021 than it was at the end of 2019. This fall is down to a predicted 11.2% GDP contraction this year, compared with a 10.1% contraction forecast back in September.
If expected growth figures were not sobering enough, this week we had a visceral reminder of COVID’s economic fallout. On Monday, Phillip Green’s Arcadia Group – owner of fashion retailers Topshop, Burton, Evans and more – went into administration. Hours later, Debenhams followed suit, bringing its 200-year history to an abrupt end. The liquidations close another act in Britain’s ‘Death of the High street’ drama. Few will shed a tear for the scandal-ridden almost-billionaire Phillip Green, but the wider economic impact should not be understated. The Arcadia Group alone has over 400 stores, and the collapse of both companies could lead to around 25,000 job losses. This is not good news for an economy which is still effectively under national restrictions.
COVID will get some of the blame here, but the struggles of both predate the pandemic. ‘Bricks and mortar’ retailers have been under immense pressure for years, faced with fierce online competition, stagnant consumer demand and bloated rental costs. Debenhams is a prime example. After being gobbled up by private equity, the high street chain was saddled with debts and had much of its freehold property portfolio sold then leased back. According to its administrator, Debenhams went into administration with £700 million of secured debt and £200 million of trade creditors.
Whatever hope the company had of finding its feet were dashed once the virus emptied Britain’s streets. “There was a salvageable business in there” said previous Debenhams chair Ian Cheshire. “Then the pandemic blew a hole in the side of it.”
Aside from the hit to employment, the fall of household-name retailers has had a big effect on Britain’s property market. We wrote recently that signs are positive for UK residential property, backed by regulatory changes and easy lending standards from the country’s banks. Commercial property, however, is a different story. With restrictions set to remain for the foreseeable future (and psychological ‘scarring’ likely to last much longer) it is hard to be positive about retailing real estate, even if tiered restrictions ease off in 2021. Some of the physical spaces once occupied by Debenhams and Arcadia will be snapped up by competitors, but it is likely many stores will just be left empty. “They’re just too big,” according to one commercial real estate agent. “Most will need rethinking and repurposing once a new normal resumes”.
However, despite the gloomy headlines, the wider UK retail equity market actually saw a significant rally this week. As the chart below shows, the FTSE 350 General Retailers index spiked around the same time as the Debenhams and Arcadia news. Perhaps the demise of these two ‘names’ makes things easier for the rest – particularly if they can capitalise on resurgent demand from a freshly-vaccinated population.
Back to dire pronouncements on the UK economy. The OECD noted that Britain’s slowness to react to the pandemic meant harsh lockdown measures came in more abruptly – and lasted longer – than other nations in Europe and Asia. A failure to agree a Brexit deal with the European Union (EU), or an early fiscal retrenchment were mentioned as other potential negatives.
The OECD has a mixed record as a forecaster, and its predictions may have slight, if inadvertent, political dimensions. It may be right about the lasting virus impacts, but the probability of a Brexit deal is rising, in our opinion (and was high last week). We also think the UK government is not about to revert to austerity.
And in itself, Brexit can bring advantages, even if those advantages (e.g. a greater flexibility and potential speed of policy implementation) may struggle to counterbalance the drawbacks. To make actual gains from the potential offered by Brexit, we need an agile government, and a responsive private sector.
One area where the UK can be a real leader is in climate change, sustainability, ethical investing, and environmental, social and governance (ESG) issues. The UK’s investment managers are awash with liquidity looking for the right assets. There are UK universities and companies’ research groups with ideas waiting. There is a huge demand globally for viable solutions, and that will be increased substantially if US President-elect Joe Biden gets his policies underway and the US re-joins the Paris Agreement on climate change.
The UK will host the postponed COP26 summit next year. Ahead of that, on 12 December (and on the fifth anniversary of the forging of the Paris Agreement) a ‘climate ambition summit’ will be hosted by Boris Johnson and United Nations Secretary-General, António Guterres. Beforehand, Johnson has taken the opportunity to announce an ambitious national target for cutting emissions substantially by 2030. He has the opportunity to encourage UK businesses to take the (much needed) lead in this area.
CEO Tatton Investment Management Limited
CIO Tatton Asset Management
The severity of the impact of the pandemic on economies and societies around the globe has been overwhelming; it seems not one person has been free of its force. However, critics are unrelenting in their claims that the ramifications could (and should) have been anticipated. Does this make COVID-19 qualify as a ‘black swan’ event?
As devised by financial theorist and writer Nassim Nicholas Taleb, the expression ‘black swan’ denotes any event that is extremely rare, has a severe impact and cannot be predicted, although after the event, people will rationalise it as predictable. The term is based on an ancient saying that assumed black swans do not exist.
Black swans of the past
By way of example, the history pages contain a number of black swan events such as the Spanish flu outbreak (1918), ‘Black Monday’ (1987), the 9/11 terrorist attacks (2001), the dotcom bubble (bursting 2001), the SARS outbreak (2003) and the global financial crisis (2008).
Although COVID may present as a textbook case, some commentators are arguing that it fails to constitute a black swan event. Rare? Maybe. Severe impact? Absolutely. Unpredictable? Perhaps not.
Back to the history books. They teach us that major outbreaks of infectious. diseases do occur. In addition, Barack Obama, Bill Gates, George W. Bush – and Nassim Nicholas Taleb – have all delivered ominous warnings about what could happen if we failed to prepare for future pandemics. Based on this, is it plausible to say the coronavirus pandemic was entirely unpredictable?
A fine line?
Those who say it does qualify as a black swan have signposted the exceptional brutality and rapidity with which the virus spread and impacted financial markets. One financial commentator added: “It has been incredibly fast-paced… The speed and ferocity has been utterly breathtaking.”
Conversely, Taleb advocates that the virus does not fit his description. You can’t dispute that it has had a major impact on the global economy and people’s lives, but there are also multiple examples of severe global outbreaks, including SARS, Ebola, and the H1N1 influenza pandemic – from the 21st century alone.
Whether the pandemic qualifies as a black swan event or not, history has taught us that black swans come along every so often and are an inevitable part of life for long-term investors. You can rely on us for expert advice and guidance to navigate the road ahead, and to ensure your finances are as well prepared as possible for all eventualities.
Having spent most of 2020 hoping things can get back to normal, Britain’s political news over the last couple of weeks has left us thinking ‘be careful what you wish for’. Stalling Brexit talks, political disarray and the potential for a full-blown constitutional crisis all created that familiar feeling of prepandemic times. Indeed, as if there was not enough déjà vu, parliamentary action even saw Ed Miliband standing in as leader of the opposition.
Jokes aside, the emphatic return of Brexit risks to Britain’s economy and capital markets is clearly bad news. Those sympathetic to the government insist that the provisions laid out in the Internal Market Bill – allowing the government to unilaterally break international law – are just a negotiating tactic to establish a credible threat of ‘no deal’. But reaction from the continent, and within Johnson’s party itself, suggests this particular negotiating ploy is unlikely to pay off.
Even if it does, in the short-term it will cause great uncertainty over Britain’s relations with its largest trading partner – not to mention the constitutional chaos it might bring (if passed in its current form, the bill would almost certainly be challenged in the Supreme Court). As we have seen over the last four years, uncertainty is highly detrimental to businesses and consumer expectations.
Accordingly, capital markets reacted swiftly to the news. After a strong run in recent months, sterling fell dramatically last week, sinking to €1.07 against the euro and $1.27 against the dollar – its deepest weekly fall since March. At the time, head of Lombard Odier’s currency strategy Vasileios Gkionakis told the Financial Times that “The market is simply going through a rude awakening,” readjusting for Brexit risks that seemed to clear over the summer.
However, the sell-off was short lived. Throughout this week, sterling has regained much of its losses against its global peers and, at the time of writing, sits around €1.10 and $1.29 against the euro and dollar respectively. UK equities made marginal gains last week – partly down to the weakness of sterling itself – and this week have edged slightly higher overall. Interestingly, Brexit turbulence gave investors a fright, but only briefly. For nearly five years, Britain’s long and drawnout divorce from Europe has been one of the main drivers of UK asset prices (and in the case of sterling, practically the driver). Now that we are again facing down a precarious Brexit deadline, why the nonchalance from global capital markets?
Put simply, we suspect it is the pandemic. With the world edging out of lockdown in recent months, the key question on the mind of most investors has been when the cyclical rally – backed by a recovering economy – will begin. Historically, UK equities (especially the FTSE 100) are extremely sensitive to cyclical forces – growing when global growth is strong and lagging when it is not. If growth – in its conventional ‘analogue’ rather than ‘digital’ shape – is indeed returning, it therefore bodes well for UK assets.
From this perspective, UK stocks look cheap. Even before Brexit, the UK was unloved by global investors. With political risks piled on, British assets have been consistently underbought relative to other major markets, resulting in UK stocks making up a much smaller portion of global investment portfolios than a decade ago. In valuation terms, UK stocks are currently trading at around 16.5x their expected future earnings on average, compared to around 19x for European stocks and well over 20x for US equities. It is even slightly below the global (excluding US) average at around 18x.
That relative undervaluation is – to an extent – justified.
The prospect of a hard Brexit as the UK is still reeling from a total economic shutdown is a significant economic risk. But for the past few years, anxious investors at home and abroad have been selling UK assets. As such, even in the worst-case scenario of a chaotic ‘no deal’ Brexit, the immediate downside is limited.
There are just not as many investors left to sell. This can be seen from the performance of the FTSE 100, which has traded mostly sideways for months. When you combine the prospect of a global cyclical recovery, UK assets look like a bargain. Indeed, even if global investors remain pessimistic on UK equities, a rebound in global activity – and subsequent increase in company earnings – would mean that equity prices could rise without much of a change in valuations.
However, two things need to happen for this positive scenario. First, the cyclical rally has to materialise. While there are some emerging signs, it is simply too early to tell. Second, some kind of resolution to the Brexit drama needs to be found. For now, the dark cloud of a hard Brexit looms large over UK markets, making many investors uninterested even at cheap valuation levels. Threats to unilaterally break components of an already-agreed treaty do little to help them.
There are reasons for positivity, though. Reports this week suggest Britain is willing to deal with the thorny issue of fisheries more pragmatically in its negotiations with the EU. And, while much was made on the issue of full sovereignty in deciding state aid in the latest Brexit spat, the recently agreed free trade agreement with Japan already commits Britain to stricter state aid restrictions than the ones that have caused the latest furore. Given a negotiation success towards the EU on the freedom to subsidise issue would therefore not actually result in any more leeway for the UK, this suggests the government may be willing to reconsider its position – leading to a swifter resolution.
For now, the barriers to an agreement seem to be mostly superficial. But as the last four years have shown, things can quickly take a turn for the worse. If an agreement can be reached – and if the cyclical rally does indeed begin – UK assets will be in a good position. Until then, we will all have to wait and see.
Lothar Mentel, Chief Investment Officer, Tatton Investment Management
With the number of coronavirus cases rising across the UK, the Prime Minister was back on the Downing Street podium last Wednesday to announce new measures. As we enter the autumn, with the country at a critical moment and the average rate of new infection four times higher than in mid-July, the government announced the introduction of the rule of six. From Monday (14 September) social gatherings of more than six people (of all ages) are banned in England. This limit applies to indoor and outside settings and is enforceable by police, who will issue fines or make arrests.
A support bubble or single household larger than six, will still be able to gather and COVID-secure venues such as gyms, restaurants and places of worship, can still hold more than six in total. The rules do not affect education and work settings.
Boris Johnson said, “we must act” to avoid another lockdown, adding, “Let me be clear – these measures are not a second national lockdown – the whole point of them is to avoid a second national lockdown… I wish that we did not have to take this step, but, as your Prime Minister, I must do what is necessary to stop the spread of the virus and to save lives… it is so important that we take these tough measures now.” Matt Hancock said the new rules will not be kept in place “any longer than we have to.”
During the briefing, the Prime Minister also outlined ‘Operation Moonshot’, an expansion of testing to ten million a day by early 2021. Frequent testing of the population would allow people without the virus to conduct their lives as normal, allowing the economy and society to remain open despite the virus being in circulation. Boris Johnson said the government was “working hard” to increase testing capacity to 500,000 tests a day by the end of October.
Quarantine list additions: Last week, in a change of policy for the government, England introduced island-specific quarantine, rather than restrictions applying to an entire country. Travellers arriving in England from seven Greek islands needed to self-isolate from 4am last Wednesday. Mainland Portugal was placed back on the quarantine list last week, effective from Saturday (12 September) morning. Meanwhile, Sweden has been added to England, Scotland and Wales’ safe lists.
Economic growth and trade talk wrangling’s: According to official figures from the Office for National Statistics, the UK economy grew by 6.6% in July, the third month in a row of economic expansion. Despite this, output remains below prepandemic levels and the ONS outlined the UK ‘has still only recovered just over half of the lost output caused by the coronavirus.’ The UK’s economy is 11.7% smaller than it was in February.
Despite subdued trading, the FTSE 100 ended higher last week. Trade deal negotiations between the UK’s Brexit negotiator Lord Frost and his EU counterpart Michel Barnier continued last week. The UK has published a bill to rewrite parts of the withdrawal agreement it signed in January, but the EU is demanding the UK drops plans to alter it. Lord Frost said, “Challenging areas remain and the divergences on some are still significant”, but UK negotiators “remain committed” to reaching a deal by the middle of October.
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As Storm Francis lashed the UK last week, another storm was brewing as the government took a late U-turn regarding the use of face coverings in schools in England. From the beginning of September, secondary pupils and adults in local lockdown areas of England and in areas facing extra government restrictions, will be required to wear face coverings when moving around the school, in corridors and communal areas.
Any secondary school in England will have discretion to introduce the use of face coverings in communal areas, where social distancing is not possible, a move which has prompted criticism from some teachers, with the announcement last Tuesday being made just hours before schools reopened in Leicestershire. The guidance does not include the use of face coverings in the classroom during lessons, where the government says they could ‘inhibit learning.’ The guidance extends to further education colleges but not to primary schools. Education Secretary Gavin Williamson said the new policy follows updated advice from the World Health Organisation, “Our priority is to get children back to school safely. At each stage we have listened to the latest medical and scientific advice… I hope these steps will provide parents, pupils and teachers with further reassurance.”
Eat Out success prompts extension – Some restaurants are keen to continue offering discounted meals in September, following the success of the Eat Out to Help Out initiative in August. The scheme ended on 31 August, but nationwide chains including Prezzo, Harvester, Toby Carvery, Bill’s and Pizza Hut are amongst those due to take part, although the eateries will have to cover the costs themselves.
Support for those self-isolating on low incomes – From Tuesday (1 September), workers on low incomes living in parts of England where there are high coronavirus rates will be able to claim up to £182 if they have to self-isolate. Strict eligibility criteria mean people claiming Universal Credit or Working Tax Credit, who are unable to work from home, will qualify for the £13 per day payment. The benefit is initially being trialled in parts of North West England. Eligible individuals who test positive and are employed or self-employed, need to isolate for 10 days and will receive £130. Eligible members of the household, who would have to self-isolate for 14 days, will be entitled to a maximum of £182. In addition, anyone who is told to self-isolate by NHS contact tracers and meets the eligibility criteria will be entitled to £13 a day for the duration of self-isolation.
Renewed optimism US stocks hit record highs last week after Federal Reserve Chairman Jerome Powell outlined the central bank’s strategy for avoiding future crises and inflation control measures. During the week, stocks rose amid renewed optimism about US China trade tensions, with both Chinese Vice Premier Liu He and US Treasury Secretary Steven Mnuchin renewing their commitment to a trade deal.
Quarantine list additions – Due to a rise in infection rates, quarantine rules were implemented on Saturday morning for travellers returning to the UK from Jamaica, Switzerland and the Czech Republic. Cuba has been added to the list of countries now exempt from quarantine.
In other news The government is preparing to launch a campaign this week aimed at encouraging employees back to their workplaces. Lockdown restrictions in parts of Greater Manchester, Lancashire and West Yorkshire will be lifted on 2 September due to ‘positive progress’, the government has announced.
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Retail Sales Bounce Back
The latest batch of retail sales statistics revealed grounds for
cautious optimism, with official data reporting a sharp rebound
in June’s overall figure and survey evidence pointing to further
growth in July.
Data published by ONS showed that retail sales volumes increased
by 13.9% in June compared to the previous month. This surge in
sales, which followed April’s record fall and a partial recovery in May,
resulted in volumes recovering to around pre-lockdown levels as the
reopening of shops released significant pent-up demand.
Indeed, sales rose to within 0.6% of the figure recorded in February
2020, the last month unaffected by the coronavirus lockdown.
However, while this does point to a significant recovery, the data also
highlighted some notable variations across the retail landscape, with
some store types performing much better than others.
Picking up on these themes, ONS deputy national statistician
Jonathan Athow commented: “Clothing is down by about a third and
if you look at the High Street more generally, sales in physical shops
are also down by about a third. Food shops continue to do quite well,
as we’re eating at home more. But the real growth has been in online
sales. Online sales continue to go from strength to strength.”
The latest Distributive Trades Survey published by the Confederation
of British Industry (CBI) also reported further signs of optimism, with
the monthly retail sales balance rising to +4 from -37 in June. This was
the survey’s highest reported balance in over a year and suggests the
overall recovery in sales continued in July.
Perhaps unsurprisingly, the CBI survey also painted a mixed picture
across the retail scene, with the improvement primarily driven by
strong grocery and hardware/DIY sales. Most other retail sectors
continued to report declines, although these were generally less
severe than in recent months.