Most financial traders barely last in the job five years, and little wonder, given the stress of following every pitch and heave of the market.
They’ve had it even worse in recent weeks. First, lockdown precipitates a crash on markets. Then leading governments unleash a fiscal bombardment, markets start to rise, aided by a heartening US payrolls report. But last week, the chair of the US Federal Reserve acknowledged that the Fed doesn’t expect a full-blown economic recovery any time soon, and markets started to slide once again; or, to put it another way, US stocks dropped 34% between 19 February and 23 March, then had risen 40% by 4 June. Last week, they started to slide again.
And then there are the economic numbers. Last week, the OECD warned that the world was experiencing its worst peacetime slump for 100 years; meanwhile, the pandemic-induced US downturn was officially labelled a recession by the country’s National Bureau of Economic Research. Thus ended more than a decade of economic expansion – the longest in US history. As for the UK, data last week showed that GDP contracted by a stunning 20% in April. With numbers like these, you can at least be sure what a central banker isn’t going to do.
“We’re not thinking about raising rates,” Jerome Powell, Fed chair, said last week. “we’re not even thinking about thinking about raising rates.”
Indeed, 15 of the rate-setting committee’s 17 officials said they expect to hold rates close to zero through 2022. Another worry was a potential second wave: last week Beijing returned to partial lockdown, and new COVID-19 case numbers rose in Texas and Florida, as did hospital admissions in California. The S&P 500 index fell back below 3,000 points, ending a record run of 50 consecutive days of gains. The FTSE 100 came within a whisker of falling through 6,000 points again (and then actually did break through early this week); Carnival and Rolls Royce both suffered as travel and transportation woes continued.
The UK faced new forecasts of falling house prices; gilts carrying negative yields; a rise in job losses; a dramatic scaling back of businesses’ investment plans (as per an IoD business tracker); a threat from BA that it would sue the government over quarantine measures; and a warning from the outgoing chair of the Confederation of British Industry that the cash reserves companies had put aside for Brexit disruption had been spent on COVID-19. (Brexit talks remain all but deadlocked.)
“The Bank of England has much more work to do,” said Capital Economics. “It will probably start by announcing £100 billion more quantitative easing (QE) at the meeting on Thursday 18th June.”
Lockdown may dominate, but other corporate developments still matter. Unilever, the 90-year-old Anglo-Dutch company, completed its extended U-turn by deciding to incorporate only in the UK after all – a relief for London, but investors were unmoved. And Tesla last week became the most valuable car company by market capitalisation, overtaking Toyota – an astonishing feat, if the price is justified.
As globalisation retreats, the signs (or results) are multiple: the race for a vaccine increasingly resembles an arms race between nations. Last week, the EU took the surprise step of complaining that Beijing has been spreading disinformation on COVID-19 around the world. Meanwhile, as Zoom (a US company) blocked a video meeting marking the anniversary of the Tiananmen Square protests of 1989, speculation mounted over the implications for US businesses of a US Department of Commerce expansion of sanctions (announced in May) on Huawei; the Chinese tech giant will struggle to access the US semiconductors it needs to make waves abroad with 5G.
“To actually build up a modern chip fabrication facility is extraordinarily difficult without US tech,” said Dan Wang of Gavekal Dragonomics. “The sanctions could be very significant. Huawei may have very major issues beyond 6-7 months manufacturing its smartphones as well its base station – this will substantially affect China’s 5G rollout.”
Green shoots, green shift?
While traders fret over the most immediate market fallout of such tussles, long-term investors are more focused on the deeper changes that these strange times may presage for the post-lockdown global economy. One emerging beneficiary is the green agenda, not least as work commuting and leisure travel fall.
Last year, for example, China had 170 million migrant workers – rural residents who move to towns or cities for work – whereas now there are “just” 120 million, according to the National Bureau of Statistics. If government fiscal responses to COVID-19 are anything to go by, it may well be that – like younger consumers (see In the Picture) – they are willing to countenance radical green measures.
“We saw governments in the global financial crisis respond with QE and low interest rates,” said Kirsteen Morrison of Impax, manager of the St. James’s Place Sustainable & Responsible Equity fund. “This time round they’ve sought to secure jobs and put a continuity plan in place. Lessons have been learned from the last crisis on how to minimise the impact. But what we see more broadly is that now it’s shining a light on difficult to tackle issues like climate change and cyber risk. We think the support coming out of this is around a green recovery – a ‘build back better’. And the reason we’re hopeful is that it’s actually a way to create jobs.”
As the government’s pandemic bill mounts, so has speculation over how it might recover the costs. Alongside possible tax changes, the State Pension has also come back under the spotlight; specifically, the triple lock system.
Introduced in 2011, it guarantees that the State Pension will rise annually by the higher of the rate of inflation, average earnings growth or 2.5%. Wages growth has driven increases in the last two years, and new analysis from Willis Towers Watson has warned that a V-shaped recovery could see pensions rise by as much as 21.3% over a two-year period.
That would be a huge cost to the state, and ultimately the taxpayer. The figure is based on a forecast from the Office for Budget Responsibility that average earnings could fall by 7.3% in 2020 and rise by 18.3% in 2021. This scenario could be exacerbated as furloughed employees, whose earnings have been cut by 20%, revert to their original pay once the Coronavirus Job Retention Scheme comes to an end.
In these circumstances, triple locked pensions would rise by 2.5% when wages fell and by 18.3% when they rose again.
The Bank of England has predicted a less dramatic fall and rise in average earnings and, of course, there is disagreement over the likelihood of such a strong economic recovery. However, the prospect of big swings in wages growth will only fuel debate over whether the government will modify the triple lock legislation to cut costs and check the increase in the State Pension relative to earnings.
“Pensions are often seen as easy pickings for the government to save money, but they shouldn’t be,” said Claire Trott, Head of Pensions Strategy at St. James’s Place. “These are people’s lives, not just an arbitrary number, and I feel that targeting pensioners specifically is unfair. It’s clear that, on the other side of this crisis, there may be difficult decisions to be made in relation to a lot of issues, such as tax relief on pension contributions, but now isn’t the time to be throwing these ideas around.”
In The Picture
One effect of the global lockdown has been a drop in meat and dairy consumption, with one in five Brits reducing their intake. The recent shift accelerates a longer-term trend, and listed vegan food companies (or companies with a major vegan product offering) are seeing the benefits to their share prices. Ipsos Mori polling commissioned by the Vegan Society in 2015 and 2019 found there were 600,000 vegans in the UK in 2018, against just 150,000 in 2014. In a separate study published in April this year, Finder concluded that 12 million Brits will be meat-free by the end of 2020 (see https://bit.ly/3fgorUT for chart source ).
The Last Word
“I’m tired. I’m tired of the pain I’m feeling now and I’m tired of the pain I feel every time another black person is killed for no reason. I’m here today to ask you to make it stop. Stop the pain. Stop us from being tired.”
Philonise Floyd, testifying last week to Congress’s House Judiciary Committee, the same week as the funeral of his brother, George Floyd
Impax is a fund manager for St. James’s Place.
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