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Week Watch | 03 August 2020

Stock Take

Will you ‘eat out to help out’ this week? From today, UK restaurants can offer half-price meals (with up to £10 off) to customers, thanks to the compensation they’ll receive from a new government scheme designed to support the trade.
As diners load up their discounted plates, they might pause to reflect on what these extraordinary measures tell us about the restaurants, bars and cafes that make up the hospitality industry.
The sector has been hurt badly by COVID-19. Customers have stayed at home since the pandemic took hold, reducing the amount they spend on non-grocery food and drink.
McDonald’s and Starbucks – two hospitality giants that are both held in the St. James’s Place International Equity fund – revealed in their results last week what a challenging time it’s been.
McDonald’s saw a drop in its earnings and has had to spend tens of millions of dollars supporting its franchisees. Meanwhile, Starbucks made a loss for the quarter after earning $3.1 billion less than it had expected to before the pandemic. 
However, both companies are also adapting quickly. 
“You can tell that Starbucks is really hustling,” notes Rosie Malcolm of Magellan, which manages the International Equity fund. 
The coffee chain has responded by tweaking its loyalty programme and introducing measures like curb-side pickups.
Starbucks also benefits from being a trusted brand with very loyal customers, adds Malcolm, pointing out that people were still queuing for coffees at the height of the pandemic. 
She adds: “When people were given the option of risking death or missing out on their Starbucks coffee, they said: ‘Well, we’ll risk dying, thanks.’”
Even so, it’s likely that customer demand will remain unpredictable for some time. It’s far from certain that workers will resume their normal routines in the future, which means that businesses must find new ways of reaching them or encouraging them to keep spending.
The most successful companies will be those that adapt effectively. Unfortunately for smaller hospitality businesses with less cash to spend, some of these adaptations require deep pockets, says Malcolm.
“It’s been an extremely difficult period. And to come out the other side well, you need drive-throughs, you need deliveries, you need digital investments, you need loyalty programmes. Smaller operators don’t have the money to do that.”
Put bluntly, many businesses will struggle to survive – but those best-placed to take advantage of the changes in customer behaviour are likely to be large companies with strong brands.
From golden arches to gold
While the quarter contained mixed messages from McDonald’s golden arches, the price of gold itself reached an all-time high last week, breaking $1,980 per troy ounce on Monday. 
The metal is known as a ‘safe haven’ asset – meaning that investors tend to buy it during times of uncertainty, because its value tends not to fluctuate a great deal.
However, it’s worth remembering that over the long- term, stocks and shares have performed better as investments than gold or other ‘safe haven’ assets. 
Since the 1970s, for example, the value of gold is up about seven times in real terms – whereas the S&P500 stock index in the US is up 22 times in that same period.
Still, the price of gold is likely to remain high for the foreseeable future because other investments are seen as too risky, argues Capital Economics. 
Coronavirus cases
The week ended with some startling numbers from the US, revealing that its economy shrank by nearly 33% in the second quarter compared to the same period last year.
The news overshadowed a reassuring announcement on Wednesday from the US central bank (the Federal Reserve). The bank said it will step up with extra measures if it thinks that the economy is tilting downwards again.
Finally, data from various countries last week suggested that COVID-19 case numbers are creeping back up. 
Case numbers are rising steadily in western Europe, while new cases in Japan and Australia are occurring at higher levels than during the first wave, although new restrictions may cause them to peak soon, says Pantheon Macroeconomics.
Meanwhile, in the UK, lockdown was tightened suddenly on Friday across a large part of northern England after data showed a rise in cases.
The new rules state that restaurants and bars can continue to accept customers, because most transmissions in the locked-down areas appear to be taking place in family homes. A small blessing, then, for the region’s struggling hospitality sector.
 

Annual Inheritance Tax (IHT) receipts have fallen for the first time in a decade. HMRC figures released last week showed that UK estates paid IHT of £5.2 billion in 2019/20, down 4% on the previous record year1.

The decline is due to an extra tax-free allowance for family homes introduced in 2017, called the ‘residence nil-rate band’, says HMRC. The allowance rose to £175,000 in this tax year, effectively increasing the IHT threshold for married couples to £1 million. HMRC says the policy has taken 3,900 estates out of IHT entirely.

But the allowance has attracted criticism that it could push up house prices and discourage older people from downsizing. And as the government looks at ways to help cover the costs of its pandemic response, there has been speculation that the chancellor could have the allowance in his sights.

The chancellor has already ordered a review of Capital Gains Tax and has faced calls for new property taxes. The huge wealth and ‘unearned gains’ tied up in residential property could yet prove too tempting for a government that needs to fill a big hole in its finances.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

1Source: HMRC Tax and NIC Receipts, July 2020

  In The Picture

In this video, Lauren Smith, Investment Communications Specialist, reviews recent events in markets and looks ahead to what’s in store.

The Last Word

“Mr Bezos, I believe you’re on mute.”

Amazon’s CEO Jeff Bezos is prompted by US lawmakers during a digital hearing in Congress last week.

Magellan is a fund manager 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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