We are now in the last quarter of a year that started brightly, but, after March, turned into the most extraordinary year. The “Fear & Greed Index” produced by CMM business as a barometer of investor confidence has been on a roller coaster ride of its own but has now stabilised at a more neutral reading of 55 (out of 100) as shown below.
Has this been reflected in share prices?
Markets have continued to regain some poise over the last few months and we have seen much less of the day-to-day wild swings from early in the year, despite the arrival of the much anticipated second wave in Europe. Restrictions have been reimposed in many areas, although there seems to be considerable determination not to make the kind of widespread shutdowns that we saw earlier this year.
Of course, not all markets have performed the same. The UK – or at least the UK as measured by the FTSE 100 Share Index – still stands more than 20% below its level at the beginning of the year. Over the same period, the US stock market is largely unchanged while the technology heavy Nasdaq market has risen by an astonishing 30%.
Is the performance of the FTSE-100 Index all down to Covid?
Yes and no. Covid has been the catalyst, clearly, but a UK economy heavily reliant on the service sector was always going to be more affected by a shutdown of the economy and the kind of restrictions that you need to put in place to control the spread of the virus.
The nature of the FTSE 100 Share Index has also not helped things. Historically, London has had a large exposure to the oil sector, and companies here have seen sharp share price falls as demand for oil fell and, with it, the oil price. As I have said before, earlier this year most people were measuring their fuel consumption in miles per week rather than miles per gallon. Demand has picked up since, but this is still below historic levels.
The banking sector, too, has been buffeted by the suspension of any dividend payments and a vast increase in support required for the economy. As a barometer of the British economy, international investors have chosen to vote with their feet, alarmed at the perceived lack of autonomy of the sector. Brexit concerns, too, have played a part here.
Not the B word again!
I am afraid so. After the year we have had, you could be forgiven for hoping that it might have a quieter end, but the latest in a series of Brexit cliff edges is approaching at speed. Will a deal get done or won’t it? One school of thought is that, with the amount of economic disruption caused by Covid, the incremental amount caused by a “no deal” will barely be noticed, but I am not sure that is the reality. As ever with Brexit, disentangling the political noise from the reality is the challenge.
Historically, deals with the EU have been left to the last minute and, indeed, have even been done at five past rather than five to midnight. The politics of the situation clearly has a role to play here as well - Boris Johnson has to play a balancing act between his party, his electoral promises and the short and long term requirements of the economy, not to mention the slow disintegration of the not-so-United Kingdom.
Is that it for the UK then?
Is the UK about to slip quietly beneath the waves after an acrimonious split from the EU, destined to return to being a foggy island of wool manufacturers? Not at all. There are a number of world class companies who are listed in the UK and many of the next generation companies have a substantial presence in here. The UK is the biggest market for Amazon outside the US and both Google and Facebook have bases here. The issue is that a lot of the companies based here are not necessarily listed in the UK and, of course, a number of our leading companies are taken over by larger international competitor before necessarily fulfilling their full potential. In investment terms, it feels likely that this lack of exposure to more dynamic sectors will see the UK continue to diminish in importance in investment portfolios.
Where have funds been moving to?
Many companies are choosing to list their shares in the United States, which remains the deepest pool of capital in the world. Spotify, for example, are a Swedish company but chose New York for its stock market listing due to its long experience of supporting technology companies. The performance of the US market this year is, to a large extent, the other side of the coin to London’s underperformance. The companies that have really benefitted from the disruption caused by Covid are predominantly listed in the US – companies like Amazon, Paypal, Fedex Corp, Microsoft etc. – and often from unpromising beginnings. At the turn of the year, Zoom Communications was a loss-making Californian company providing video conferencing software. Fast forward nine months and it is now a verb – “let’s zoom!” – and has a market capitalisation of £141bn. A few weeks ago, the market capitalisation of Apple exceeded the entire FTSE-100 Index combined! Strange times, indeed!
Should I be worried about the US election?
This election campaign has hardly been an edifying spectacle and it is hard to see how anyone will win in the longer term from it. Donald Trump, fresh from his short period of isolation, looks on the ropes and is lashing out on Twitter at all and sundry. His opponent, Joe Biden would, at 77 be the oldest president ever elected. Polls currently point to a Biden victory, but we have all been too wrongfooted in polls over the last few years to take anything for granted ahead of the November election.
Whoever, wins, there is still a Covid outbreak to cope with. Both men have committed to large amounts of spending to boost the economy with the difference being where the funds will be spent. Either way, this is certainly not a negative for the US economy and is likely to be followed by European plans to boost their region in the new year.
We should, of course, always pay attention to the US election as the US economy is so important to global growth. However, its relative importance is diminishing as Asia and, in particular, China have seen their economies grow over the last decade alongside their global influence.
How is China doing?
Perhaps because of its experiences over the last couple of decades with Bird Flu/Sars etc., China has bounced back pretty quickly from its own shutdowns earlier in the year. Occupancy rates in Chinese hotels is now back to 80% of the normal rate for this time of the year and room rates higher. What would US and European hoteliers give for that! The interesting point to draw from this, in my opinion, is to highlight how things can return to a more normal and stable one, relatively quickly.
The trade dispute with the US rumbles on and, clearly, could deteriorate further in the event of a Trump victory. Do not be fooled into thinking, however, that it will all be sweetness and light if Biden wins. Targeting Chinese companies like Huawei increases Chinese determination to come up with Chinese solutions to their internal markets which is a negative for some of the major US Technology companies over the medium term.
China has seen many of the same changes that we have seen here, with a sharp increase in online activities and an acceleration of the rate of change as new technologies are introduced to cope with Covid restrictions.
What will the new normal look like?
An interesting question indeed! The short answer is that we don’t really know, apart from to say that it won’t be identical to the old normal. Covid has massively accelerated a whole series of trends which were already in place. There had been a steady shift of sales from the Bricks & Mortar of shopping centres and high streets to online – it had risen to around 20% of sales in the UK over the last 10 years, recent figures from the Office for National Statistics showed, before spiking to more than 30% this year. It is hard to see all of these sales going back, just because the shops are now open.
Changes to working practices - many people working remotely, a lot of meetings taking place online and overnight stays and conferences sharply reduced - have profound implications for the travel industry, for hoteliers and for office designers. These situations are, clearly, evolutionary, but it feels unlikely that these trends, which were already in place beforehand, will go back to where they were.
What other major trends are there?
The other major trend which seems unlikely to disappear anytime soon is the environment. Oil prices, buffeted by a slowdown in global growth are also experiencing a change in demand profile. The question as investors is whether the falls in share prices represents a cyclical downturn – ie one that reflects a downturn in the economy – or is more about secular decline – an industry in long term decline due to much broader shifts. An old Minister of Oil for Saudi Arabia is quoted as saying “The Stone Age didn’t end because they ran out of stone, and the oil age will end long before the world runs out of oil” and maybe that is what we are witnessing here. Hybrid car sales were more than 50% of car sales in the UK this year and there is clear public policy in place to shift to renewables and away from carbon-based energy sources.
At the same time, a lot of the stimuli packages being planned are likely to focus on ecological outcomes (albeit in the US this depends on the outcome of the presidential election). The EU has been very clear that any spending will be focussed on the industries of the future rather than those of the past, while a Biden presidency has proposed a package of a trillion dollars. Even Boris has promised that we will all be wind powered by 2030. Sure, that means putting up a new wind turbine every day between now and then, but the sentiment is there.
Joking aside, these issues are not going away and it feels inevitable that there will be a substantial shift in investment over the decades ahead. The fact that BP is now describing itself as a global energy company is a clear indication of which direction they see the wind blowing.
Is Covid yesterday’s news?
Covid is likely to be with us for a while to come yet. Work continues apace at a vaccine, but we should remember that any wider spread dissemination and an ultimate Covid free (or Covid controlled) reality will be some time away. Spanish flu in the 1920s hung around for a couple of years, albeit with a diminished mortality rate by the end, and it feels as though Covid may tread a similar path.
As ever, we should try not to get too fixated by the situation in the UK and project that image worldwide. Many countries are at a different stage in the epidemic to us and we can learn lessons from their recovery. A second wave may be followed by a third or a fourth, but the global effort to find a solution is continuing and, combined with a greater herd immunity will, ultimately, make each wave more controllable than the last.
Reviews
You should shortly receive your regular valuation report which should show a continuation of the stability seen since the dark days of March. As usual, I would highlight that this is simply a thirteen-week period and our investment time horizons are considerably longer than this. Interest rates are likely to remain at negligible – even negative – rates for the foreseeable future and this, combined with further packages from governments, should underpin global growth over months ahead.
Contact Brewin Dolphin on 01865 255 750 or at steven.banham@brewin.co.uk
