The Big Picture: economic and political summary for October from QuotedData
Every month here at QuotedData, the investment trust analysts collate the insights on markets and economics taken from comments made by chairmen and managers of investment companies investing across the globe. We organise these to highlight what the sector’s trusts believe are the factors relevant to performance in their particular geography or industry sector.
The summer cheer was replaced by concerns over the inevitability of a second wave and the realisation that COVID-19 will be with us for some time to come. Elsewhere, the lack of progress in defining the path towards Brexit weighed on sterling.
Mindful of non-COVID risks
Tim Woodhouse, Rajesh Tanna, and Helge Skibeli, managers of JPMorgan Global Growth & Income, are of the view that this crisis does not resemble the global financial crisis – they do not see existential threats to the financial systems. Instead, they view this as a shock that has taken us to the beginning of a new business cycle.
Christopher Mills, CEO of North Atlantic Smaller Companies, notes that as worldwide schemes to protect employment are unwound and unemployment rises, it is hard to be overly optimistic about corporate profits in most industries.
Zehrid Osmani, manager of Martin Currie Global provides an in-depth review of the pandemic’s economic impact on the likes of the US and China, to-date. Zehrid touches on several factors making it had to plot the shape of the economic recovery. The manager also discusses his outlook for equities in this low-yield setting, while flagging up some geopolitical risks lurking in the background.
Simon Edelsten, Alex Illingworth, and Rosanna Burcheri, managers of Mid Wynd International, discuss why they believe inflation could rise over the next year or two, albeit from a very low base.
A long period of sub-par growth, limited inflation, low interest rates, and high corporate debt awaits?
David Barron, chairman of Dunedin Income Growth, says that the prospects for global growth were modest and arguably deteriorating before COVID-19.
Charles Luke and Iain Pyle, managers of Murray Income, believe it is likely that that the post-pandemic environment will be characterised by a long period of sub-par growth, limited inflation, low interest rates, and high corporate debt.
The managers also flag up the unclear trajectories of Brexit and the US election. The managers expect to be placed on companies possessing attractive yields, sound growth prospects and strong balance sheets.
In the wake of the accelerated shift to online retail, the bankrupting of landlords is helping to reset rents to more justifiable levels
Steve Tatters, manager of Aurora, estimates the government has so far spent £50-60bn to support the solvency of UK businesses. He says this has kept businesses from going bust, but it has not helped profitability.
Steve adds that households have lost £50bn of income so far versus a total net wealth of over £12trn. Looking at the shift to online retail, the manager says that it has accelerated the process of resetting rents to levels justified by the realities of the shift to online.
Because of the rigidity of commercial leases (upward only rent changes) and the rates system it is happening through the bankrupting of landlords.
The manager of Crystal Amber says that while huge central bank stimulus has injected liquidity into global markets, some institutional investors, who had pulled back from smaller companies before the pandemic have not returned.
Philip Remnant CBE, chairman of City of London, believes that the large fall in dividends paid has taken down the true yield of the UK equity market to between 3% and 4%. Even at such levels, this remains significantly more than the main alternatives of fixed interest and bank deposit rates.
The large fall in dividends has taken the true yield on UK stocks to between 3-4%
The manager of Aberdeen Smaller Companies Income says that while many companies have experienced sharp earnings declines this year, taking into account the rebasing of expectations in the near-term, over the long run it should create sustainable income streams with better dividend cover.
Within the expectation that recessionary times are coming globally, the manager expects the UK to suffer materially, with unemployment at unprecedented levels. Whilst government pledges to do what it can with areas like VAT cuts & stamp duty changes, the manager adds that we are yet to see how demand returns and what shape the recovery will be. This recession will certainly be more ‘main street’ than ‘Wall Street.’
Brexit and the US election bring the risk of greater volatility over the coming months. On the former, the possibility of a hard Brexit remains
Margaret Littlejohns, chair of Henderson High Income, says that the UK’s withdrawal from the EU at year-end, a possible escalation of trade tensions between China and the US and the US government election itself in November are all likely to contribute to volatility and nervousness in the markets.
Liz Airey, chair of Standard Life UK Smaller Companies, reflects on the slow progress of the Brexit negotiations. Given the limited time to complete them, the possibility of a hard Brexit remains.
Canada is a leading incubator for innovation and technology
The manager of Middlefield Canadian Income notes that the vast majority of Canadian and U.S. dividend payers maintained their payout levels as their share prices continued to clawback losses throughout the second quarter.
The manager adds that central bank policies are expected to remain accommodative and GDP growth is positive in most regions. Canada remains a leading incubator for innovation and technology.
The chairman of North American Income, James Ferguson, says that unemployment benefits in the US have begun to roll-off and an additional stimulus package is likely to be needed for many who have been unable to return to work.
If future stimulus remains held up by political wrangling in Washington, there are greater concerns with regards to the health of the consumer in the near term. James also touches on the incentive to continue some of these programmes as we enter the November election season.
E-commerce penetration in the US had hitherto been unusually low
Baillie Gifford US Growth pays significant attention to the widespread adoption of e-commerce in the US, where penetration levels had previously been unusually low. Prior to the pandemic, e-commerce comprised just 16% of retail sales in the US. In the outlook section, the manager notes that innovation is speeding up and spreading out to sectors which have hitherto been untouched by the digital transformation.
China is on pace to become a superpower by 2030
The manager of Pacific Horizon outlines how the ‘old order’, including both public and private institutions in the West, was tested and found wanting, socially, politically, morally and economically. In contrast, the Asian model, so far, has held up relatively well. China, the epicentre of the viral outbreak, is still on pace to become a superpower by 2030.
Discussing the potential impact of a second wave, Susan Platts-Martin, chair of Witan Pacific, says that hope lies with greater preparedness, improved understanding and treatment and the accelerated pace of vaccine trials. She adds that China may be one of the few countries to grow its economy this year.
Domestic retail investors have been driving the moves in the Chinese and North Asian markets
Robin Parbrook and Lee King Fuei, managers of Schroder Asian Total Return, notes that Chinese A-shares have been looking increasingly frothy since May, and this froth has now spilled over into the broader China markets and now appears to be spreading to parts of the Taiwanese and Korean equity markets. The driver of the recent moves in the Chinese and North Asian markets has principally been domestic retail investors.
India is benefitting from the diversification of global supply chains
The manager of India Capital Growth reflects on the pandemic, noting that India’s recovery rate is rising, and its fatality rate remains low (at 2%) by global averages. It would seem that some combination of a young and resilient population and a warmer climate are ensuring, for the time being at least, that India is managing better than many had predicted.
The manager also discusses the long-term opportunity India has as part of the diversification of supply chains that had become overly reliant on China.
The manager notes that India’s labour cost is now one-third of China’s, and we are already witnessing global corporates using India as an alternative hub, albeit in niche sectors today.
India-based manufacturers of active pharmaceutical ingredients and speciality chemicals, in particular, are seeing gains in market share.
India has been benefitting from the fall in oil prices. At current prices, it will save around $30bn annually
The manager of Ashoka India Equity says the economy could contract by a mid-single-digit figure this year. On the plus side, India benefits from the fall in oil prices, given that it imports over 80% of its requirements. At current levels, with Brent crude prices of around $40/bbl, India is expected to save approximately US$30bn annually.
We have also included comments on the flexible investment sector from Livermore and CIP Merchant Capital; Europe from European Opportunities: Latin America from Blackrock Latin American; global emerging markets from Africa Opportunity and Gulf Investment; Japan from AVI Japan Opportunity and Baillie Gifford Shin Nippon; South Korea from Weiss Korea Opportunity; Vietnam from Vietnam Enterprise; the debt sector from M&G Credit Income, CVC Credit Partners European Opportunities GBP. Marble Point Loan Financing, Blackstone/GSO Loan Financing, CQS New City High Yield, Biopharma Credit and NB Global Floating Rate Income GBP fund. Some private equity companies invest directly, some make investments in funds and some invest in a mixture of the two.
“>private equity from Oakley Capital Investments and HgCapital Trust hedge fund covers a multitude of different investment strategies. They tend to be structured as limited liability partnerships or companies. A few will allow an investor to enter or exit on a daily basis but most commonly this will be monthly or quarterly, some are even longer. They invest in all sorts of assets. They will often include an element of hedging within the investment strategy.
“>hedge funds from Third Point Offshore Investors; the leasing sector from Tufton Oceanic Assets and DP Aircraft I; insurance and reinsurance from Life Settlement Assets A; biotech and healthcare from RTW Venture; infrastructure from International Public Partnerships; renewables from Bluefield Solar Income, US Solar, Octopus Renewables Infrastructure, Aquila European Renewables Income, Greencoat Renewables, Foresight Solar, and Gresham House Energy Storage; the environmental sector from Menhaden; commodities and natural resources from CQS Natural Resources Growth and Income and Baker Steel Resources; UK property from BMO Commercial Property, Aberdeen Standard European Logistics Income, Triple Point Social Housing