Samuel Pepys would have been happy. His diary reveals that, even during the worst of the Great Plague in 1665-66, and despite the clear risks to his health, he kept up his visits to London’s pubs, albeit less frequently. Fast-forward to 2020, a trip to the local hostelry will soon be back on the cards.
Four months after plague deaths peaked, Pepys wrote that “the town fills apace, and shops begin to be open again”. In announcing the most significant relaxation yet of lockdown rules and social distancing guidance in England, Boris Johnson hopes that the population will emulate the author and his fellow Londoners and quickly return to their former lives.
If the virus is contained, and social distancing measures are gradually eased, pubs and restaurants may indeed be busy again by Christmas. But Capital Economics suggested last week that it is not a fear of getting out and about that will hold back the economy for the next year or two. The biggest risk to GDP returning to pre-crisis levels is that the fall in incomes and revenues will reduce the ability of households and businesses to spend.
European markets were boosted on Tuesday when a closely watched survey of business activity indicated a better-than-expected recovery in the continent’s major economies in June. In the eurozone, France led the way, reflecting a faster easing of containment measures. The data suggested that the level of economic activity reached its nadir in early April in most developed markets.
The figures were released a day after a CBI survey showed that British industrial output had recorded its biggest ever quarterly fall in the three months to June. The International Monetary Fund lowered its global growth forecast and said it expects the UK economy to shrink 10% this year. Unemployment is expected to more than double from its current rate of around 4% to hit the levels of the 1980 when the government closes its furlough scheme in October. The Post Office and Swissport, the aviation services firm, were the latest companies to announce thousands of UK job losses.
After Tuesday’s rise, however, the mood on markets deteriorated and stocks slid over the week. The number of new coronavirus cases surged in several US states, which reimposed lockdown restrictions and paused reopening plans. Friday saw a record spike in cases across the country, intensifying fears that the nascent economic recovery is in jeopardy. New York allowed companies to reopen their Manhattan offices on Monday (although few workers returned) but was then compelled to impose quarantine restrictions on people travelling to the area from eight other US states.
There is, of course, a political element to the reopening of the US economy, and November’s presidential election is likely be another factor that influences markets over the rest of the year.
“Politics weigh heavy here,” commented Jeffrey Cleveland of fund managers Payden & Rygel, based in Los Angeles. “If you ask someone of a certain side of the political aisle where they stand on things masks, shutdowns and virus concerns, it does seem to break on political lines.”
Right now, things don’t look great for President Trump. “Prediction markets currently put the chance of a Democratic sweep (of the presidency, House and Senate) at its highest in this cycle, and that’s a lot to do with the economic backdrop,” added Cleveland.
Apple and advertising
Meanwhile, the tech mega-stocks march on. The FAANGMs now represent 25% of the S&P 500 by market capitalisation and were in the news last week. Apple announced that it will transition from using Intel chips in its Mac computer to processors designed in-house – a move that will take two years to complete. “This allows Apple to unify the underlying architecture across its device family, providing the basis for easier app development across the entire product range. It will significantly blur the lines between the Mac, iPad and iPhone,” commented Mark Baribeau of Jennison Associates, co-managers of the St. James’s Place Balanced Managed fund. “Moving away from paying the ‘Intel Tax’ will also materially increase margins, as it reduces the cost of the processing units.”
Last week also brought news that spending on digital advertising on platforms such as Google and Facebook is set to overtake that on traditional media for the first time this year; a shift accelerated by the coronavirus pandemic. Yet, Unilever, Starbucks and Coca-Cola were among more than 90 companies to announce a boycott of advertising on Facebook as part of a campaign to stop racist, violent or hateful content from circulating on the platform. Facebook’s share price dropped nearly 10% last week.
Is this a temporary blip for Facebook’s prospects? “The market has historically underestimated the scope of the advertising businesses of Google and Facebook. Facebook allows ad buyers to efficiently reach more than three billion monthly active users across its products,” observed Eric Goldstrand of Burgundy, co-managers of St. James’s Place Worldwide Managed fund. “These companies have unique attributes and characteristics, so they should not only weather the current situation well but be able to take advantage of opportunities as they are presented.”
Yet, just as researchers are battling to discover an answer to Covid-19, Mark Zuckerberg must find a speedy solution to the problem of harmful content.
Participation in workplace pension schemes is on the rise, as more eligible employees auto-enrol and invest in their financial future. But worryingly, the proportion of self-employed workers contributing to a pension has fallen by a third over the last decade.1
Figures recently published by the Department for Work and Pensions show that 88% of eligible employees saved into a workplace pension in 2019, up from 87% in 2018.2 Yet, whilst this is a positive sign that more people are developing a long-term savings culture, are they saving enough?
“Life expectancy in the UK is increasing, so the average retirement pot will have to last longer than it does today,” says Claire Trott, Head of Pensions Strategy at St. James’s Place. “Enrolling in your workplace pension is an important first step with retirement planning; but contributing the minimum amount means you are unlikely to achieve the level of retirement income you want, plus it puts you at real risk of outliving your savings.”
Self-employed workers are not covered by auto-enrolment, and there is concern that the fall-out from the Covid-19 pandemic will add to the decline in contribution rates as businesses come under even more pressure to cut costs.
“The retirement landscape is changing at the same time as workers are facing a very uncertain economic outlook.” adds Trott. “Difficult though it can be, it’s vital that employers, and self-employed business owners, don’t lose sight of their long-term savings targets.”
1&2 Department for Work & Pensions, June 2020
In The Picture
Lockdown measures have significantly increased people’s ability to save money. UK households have deposited a whopping £16 billion into savings accounts in April – three times the monthly average.
The savings households have accumulated through lockdown is good news for the economy, as long as consumers spend it when the retail and hospitality sectors reopen this weekend. That said, households would do well to hold back some of their new savings – with Britain facing considerable economic difficulty for some months to come, having a financial buffer in place is essential.
The Last Word
“You have an individual responsibility to yourself, but you have a societal responsibility because if we want to end this outbreak, really end it… we’ve got to realise that we are part of the process.”
Dr Anthony Fauci, US infectious disease chief, responding to a spike in Covid-19 cases in 16 US states
Payden & Rygel, Jennison Associates and Burgundy are fund managers for St. James’s Place.
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