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Week Watch | 18th May 2020

Stock Take

Day after day, day after day,
We stuck, nor breath nor motion

Thus did Samuel Taylor Coleridge’s The Rime of the Ancient Mariner describe the experience of sailing into ‘the doldrums’, or ‘equatorial calms’, in which different trade winds meet, often leaving ships unable to make progress.

Everyone knows the global economy is in the doldrums just now – the disagreement is over how quickly it might pick up an economic tailwind. An increasing number of commentators, however, believe a V-shaped recovery is now unlikely.

“A slow path out of economic lockdown has seen ongoing downward revisions to growth forecasts, as it becomes increasingly apparent that measures pertaining to social distancing will continue to be disruptive for the foreseeable future,” said Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

Both the Brookings Institution and Pantheon Macroeconomics are now predicting something halfway between a V-shaped and U-shaped recovery – a so-called ‘swoosh’ recovery. But the most notable disagreement at the moment is much broader; it is between the economic data and the stock market. The S&P 500’s current pricing effectively places the likelihood of a recovery within three months at above 80%, while the data puts it close to 20%. How is such divergence even possible?

Data last week showed that prices in the US are suffering from disinflation, freight activity is deteriorating, and private sector employment fell around 22% between mid-February and mid-April. Moreover, consumer sentiment continues to worsen but, thankfully, the rate of decline has slowed.

The S&P 500 slipped last week, on a cocktail on data, forecasts and valuation concerns. However, relative to other global indices, it has performed well of late thanks to two local factors: the level of Fed support, and the index’s high concentration of technology stocks. However, the S&P’s relative success may also mean investment opportunities elsewhere are being missed.

“Almost all the value I see currently is in emerging markets – relative to the US market, emerging world equity has never been cheaper,” said Jeremy Grantham of GMO, which co-manages the St. James’s Place Balanced Managed fund. “Besides, emerging markets now represent around 60% of global GDP and are typically growing twice as fast as developed markets.”

If that growth is in China, however, then the US appears increasingly ready to forgo some of the associated benefits of a close economic relationship – tariffs on trade between the two countries have risen significantly since the back half of 2018.

COVID-19 appears to have accelerated the US’s determination to decouple. “We could cut off the whole relationship,” the president told US media on Thursday. He may have plenty of support. Poll results published by Pew Research Center and Eurasia Group show a very significant rise in US scepticism towards China and in Chinese scepticism towards the US over that last couple of years. Talk of a ‘great decoupling’ is increasingly commonplace.

China’s economy is now showing some signs of recovery, although figures for jobs, retail sales and export orders offer some cause for concern, and the CSI 300 slipped last week. Industrial production, however, rose last month at double the rate economists had expected, which raises a new question: can China now generate enough domestic demand?

“Things aren’t totally back to normal but, anecdotally, we are seeing some positive signs – a lot of people who used to take public transport have been out buying cars because they don’t want to risk exposure to the virus,” said Alistair Thompson of FSSA Investment Managers, manager of the St. James’s Place Asia Pacific fund. “Online deliveries have been another area of growth. Domestically, consumer staples companies like supermarkets and brewers tend to be doing well – we own China Resources Beer, the largest beer manufacturer with 40,000 employees. The big question is the demand side, with three quarters of the world in lockdown, significant levels of unemployment, and the risk of bankruptcies.”

In Europe, meanwhile, indices declined over the week, with the EURO STOXX 50 and FTSE 100 both down for the trading period. Data for UK GDP showed that the economy contracted by 1.6% in the first quarter of the year – but shrunk 5.8% in March alone. Governments around Europe have taken different approaches to the virus; and those that did impose lockdown are now at different stages of loosening it. However, the societal and economic trade-offs mean that difficult decisions lie ahead.

“I’m not totally convinced that the policy response has struck quite the right balance between the costs and the benefits of saving each life, but it is probably impossible, because everyone’s view is different,” said GMO’s Grantham. “We are interrupting the education of our children, unemployment is off the chart and the failure rate among new businesses will be almost 100%. We have no idea what it will mean to have hundreds of thousands of businesses failing to pay the rent and losing their staff – just failing.”

As the pandemic crisis continues to have unprecedented impact on lives and lifestyles, new research by The Wisdom Council has provided insight into the feelings and reactions of investors.¹

Amongst baby boomers, concern about their near-term personal financial position has risen since March, as they continue to nurse losses on their portfolios. This also no doubt reflects acknowledgement by over half of investors, across all generations, that they don’t have a financial plan that can cope with the situation.

Confidence in the UK government’s response has fallen over the same period, while a significant majority of investors (70%) said they will consider individual company’s behaviour during the pandemic in their future investment decisions. How did they treat employees and customers, or contribute to the wider societal effort? The research showed that millennials felt particularly strongly about this aspect.

Reflecting some greater optimism about markets, 42% of investors now plan to invest more, with nearly two thirds of those looking to do so in the next two to three months. However, it was clear that many investors plan to drip-feed their money in; sensible behaviour given the potential for further volatility.


¹ The Wisdom Council – The Wise Society, Pulse May 2020; survey of 343 investors across ages, gender and investable wealth

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.



In The Picture

The balance of pay packets has shifted dramatically in recent decades.


The Last Word

“I may very honestly say it pains me. On the one hand I make an effort on a daily basis to have a better relationship with Russia. But when you see on the other hand that there is hard evidence that Russian powers are behaving in that way, then of course it’s an area of tension … that remains inside me. That is unpleasant.”
Angela Merkel describes her reaction to discovering that Russia had been behind the 2015 Bundestag hack


BlueBay, GMO and FSSA are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2020; all rights reserved.

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