Stock Take
At 8 o’clock last Thursday, the UK ‘Clapped for Carers’ for possibly the last time.
The weekly applause started as a way of acknowledging the sacrifices made by front-line workers. But it has come to mean more than that. It has reconnected us with our neighbours, and brought cohesion to communities that, before the crisis, rarely interacted. It has brought together a nation which, for the last four years, has been bitterly divided.
But all good things come to an end. The gesture has become too politicised, Annemarie Plas, the woman behind the idea, said last week. Meaningful recognition of our frontline workers must come from inside parliament, not the pavement outside Downing Street.
Plas isn’t the only one to fear the influence of politics: global markets ended a fortnight-long rally on Friday after tensions between the US and China came to the fore.
Recovery looking shaky
A rally in industrial and energy stocks at the start of last week excited investors. The Dow Jones closed above 25,000 points for the first time since early March, logging the largest two-day advance in a month. The resurgence of cyclical stocks – which are more economically sensitive than defensive sectors such as healthcare and technology – suggested that the economy may have turned a corner.
A rally in industrial and energy stocks at the start of last week excited investors. The Dow Jones closed above 25,000 points for the first time since early March, logging the largest two-day advance in a month. The resurgence of cyclical stocks – which are more economically sensitive than defensive sectors such as healthcare and technology – suggested that the economy may have turned a corner.
However, indices turned red on Friday after the US reacted to China’s enforcement of a national security bill against Hong Kong. In a press conference on Friday, President Trump announced that the US considered Hong Kong to be ‘no longer autonomous’. However, he stopped short of declaring any specific measures against China: markets breathed a sigh of relief, ending the week relatively stable.
Since March, the greatest threat to economic recovery has been a second wave of the coronavirus. But with geopolitical tensions now in the mix, uncertainty is coming from multiple sources. Forecasting the shape of recovery is becoming increasingly difficult and complex.
Latin America became the new epicentre of the virus on Wednesday: the region now accounts for 40% of daily deaths globally, and Brazil, whose management of the virus sparked controversy, has more cases than any country except the US.
“The implications for the virus in Latin America are broad, encompassing healthcare shortages, economic challenges, and tragic humanitarian consequences,” said Edward Robertson, from Somerset Capital Management, managers of the St. James’s Place Global Emerging Markets fund. “Government responses have been wide-ranging, and different stances on testing and quarantine are resulting in a varying ability to control the rate of infection. The challenge governments now face is whether to open up the economy to stave off rising poverty and unemployment, or maintain lockdown.” The MSCI Emerging Markets Latin America index has plateaued, remaining close to its mid-March low.
Europe’s fiscal union
On Tuesday, the European Commission proposed a recovery package worth €750 billion. The package, which requires unanimous approval from EU member states, has considerable ramifications. It significantly increases economic integration in the European Union: the money will be taken as common debt, and issued to the regions and industries in the EU that have been hit hardest by the virus, and repaid through EU-wide taxes over the next 30 years. The package signifies a mutualisation of European debt that takes the bloc closer to something like a federal union.
On Tuesday, the European Commission proposed a recovery package worth €750 billion. The package, which requires unanimous approval from EU member states, has considerable ramifications. It significantly increases economic integration in the European Union: the money will be taken as common debt, and issued to the regions and industries in the EU that have been hit hardest by the virus, and repaid through EU-wide taxes over the next 30 years. The package signifies a mutualisation of European debt that takes the bloc closer to something like a federal union.
“This proposal confirms that the EU is moving towards a substantial common fiscal response to the pandemic,” said John Higgins, economist at Capital Economics. Member states will debate the package in the middle of June, but pushback that could challenge the level and scope of economic integration is expected from Austria, Denmark, the Netherlands and Sweden – otherwise known as the ‘Frugal Four’.
The announcement lifted sentiment in eurozone markets: bonds from southern Europe’s debt-laden countries rallied in response, and equities lifted too.
“We have seen European stock markets rebound from the lows of March as monetary and fiscal stimulus has come in the matter of weeks since COVID-19 hit the headlines,” said Ken Hsia from Ninety One, manager of the St. James’s Place Continental European fund. “This compares to investors having to wait for months during the global financial crisis, showing that policymakers have learnt from the past.”
Will footfall rise, or fall?
In England from today, children of some year groups will return to school, groups of six can gather outside, and some non-essential businesses will start to reopen.
In England from today, children of some year groups will return to school, groups of six can gather outside, and some non-essential businesses will start to reopen.
The pickup in business activity may give the economy chance to offset some of the damage that has occurred in the second quarter of the year, when lockdown measures have been at their most intense. According to the Office for National Statistics, 24% of businesses are to restart trading in June, with 31% to open from July onwards.
However, reopening is only one side of the story. Businesses are relying on a rise in footfall and consumer spending to start turning a profit again. After three months in lockdown, one might presume that most people have been frugal during lockdown. But research from Capital Economics suggests that households have been saving less, not more. “There may not be much pent up demand, which would be another reason to think that the economy will only recover slowly,” warned economist Andrew Wishart.
Wealth Check
As companies tighten their belts in the face of the uncertainty created by the coronavirus, estimates for dividend cuts across the globe this year range from 25% to 50% compared to 2019.1
Thankfully, dividend bear markets – where they fall by at least 20% – are rare. In fact, looking at the US stock market as represented by the S&P 500, it’s only happened six times in nearly 150 years, compared with 16 bear markets for total returns.2
There has only been one other since the end of World War II – during the financial crisis after 2008 – when dividends fell by 24%.3 These are indeed extraordinary times.
Of course, companies don’t like cutting dividends because it sends out a negative signal about their future prospects. But further bad news for investors is that dividend bear markets typically last longer than those for total returns – 4.8 years on average compared to 1.5 years.4 This makes sense, because share prices tend to react ahead of improvements in the economy, whereas dividends only recover after companies’ finances pick up.
How long will that take? It is unlikely that economic activity will return to anything like normal for some time, and that will limit the scope for a rebound in dividends in the near term. Indeed, markets are pricing in more declines in 2021; and we may see greater divergence in pay-outs as stronger companies recover more quickly and are able to grow dividends again.
However, the dividend cuts this year have been fast and comprehensive, and not a drawn-out affair. Investors hope this signals a dividend bear market that is shorter than average this time – as happened in 2008–10.
In the meantime, investors need to consider the alternatives. Government and corporate bond yields have plummeted. Latest figures show that average no-notice cash rates fell last month at their fastest rate in eight years5, as the impact of the government’s latest Term Funding Scheme started to be felt; average notice rates for ISA and non-ISA cash accounts are the same – for the first time ever.6
These are challenging times for income-seekers but, over the long run, dividends will continue to play a vital role in helping investors meet their objectives.
| S&P 500 Index discrete one-year returns | ||||
| Apr 2019 – Apr 2020 | Apr 2018 – Apr 2019 | Apr 2017 – Apr 2018 | Apr 2016 – Apr 2017 | Apr 2015 – Apr 2016 |
| 0.2% | 12.8% | 12.6% | 17.7% | 0.5% |
Source: Financial Express. Data shown in both tables is for the S&P 500 Total Return Index.
Past performance is not a guide to future returns.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1, 2, 3, 4, Schroders, May 2020
5, 6, Moneyfacts, May 2020
In The Picture
In this video, Lauren Smith, Investment Communications Executive, reviews recent events on markets and looks ahead to what’s in store.
The Last Word
“It falls on all of us, regardless of our race or station – including the majority of men and women in law enforcement who take pride in doing their tough job the right way, every day – to work together to create a ‘new normal’ in which the legacy of bigotry and unequal treatment no longer infects our institutions or our hearts.”
Barack Obama on the death of George Floyd.
Ninety One and Somerset Capital Management 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.
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