From Q2 to Q3
The first half of 2020 has been one of the most tumultuous in stock market history alongside record high monetary and fiscal support injections to help the economies. And much of what was lost in March in terms of stock market value, has been bought back with a disproportionate amount of money going into tech and pharmaceuticals.
The speed of the draw-down as the pandemic spread and then the markets bottoming and anticipating recovery with a bounce back, gave many investors little time to re-orientate and position themselves going forward. And if you compare it to the last financial crisis in 2008/09, the speed of this one, both down and up, is unique, and does still offer a lot of opportunities due to talk of a second surge. Markets are already discounting a lot of the recovery over the next couple of years.
There seems to be a bottomless pit of monetary and fiscal stimulus, certainly central banks and governments have demonstrated their will to keep things going for as long as possible. I am mindful of what Mario Draghi said about the eurozone a couple of years ago – and I am confident they will do what it takes to support it again. I guess it is the same now with central banks and government where no one wants to be seen at the helm delivering a massive economic and stock market shock.
I certainly would not want to be a central banker right now. In some ways it is easier being involved in investments and markets because the central bankers challenge is unique. They must kick-start the economy and get demand back because there is no other way forward. They have to spend. And this will go to the highest levels seen since the second world war, so we’re going to expect and get, more fiscal, monetary and unique demand-led policies, whether that’s a cut in V.A.T or whatever – they have to get demand back into the economy to overcome the huge air-pocket that we’ve all experienced restricted to our homes in the last 3-4 months.
There are structural winners coming out of this despite the consequences caused by the pandemic. Those winners are people like you and me – working from home. Clearly our demands surrounding the IOT (internet of things) with online shopping, apps, video calls and online meetings means that technology companies and all those who adapted well during the transition, are emerging from this as winners.
While China’s demand “seems” to be picking up, and the Australian benchmark of course is doing very well, looking at this geographically, Europe’s economic activity continues on a downward curve. Spain and Italy in particular, the two worst hit European countries for Covid-19. A contraction of 9.4% was forecast for Spain and represents a wider gap between the euro zone and the Spanish economy. The coronavirus left Spain with the largest first quarter drop in GDP in nearly a century.
On Tuesday, the European Commission released its Summer 2020 economic forecast which sees GDP for Spain contract by 10.9% – this is largely to do with the strict lockdown and measures placed on the services sector. However, with restrictions lifted, Brussels is expecting the Spanish economy to rebound by 7.1% in 2021.
Switching over to the UK, we have the ‘mini-budget’ upon us which will address among other things, the elephant in the room – the debt balloon that left a £300 billion gaping hole. Also, the extra revenue that needs to be raised via the tax system. With the UK borrowing at a record pace (13.9% of gross GDP), the highest level since 1945 – policies announced need to be rolled out quickly in order to prevent slow stimulation of the economy. It is likely we will see from forthcoming mid-year data, that the budget will far exceed the whole of 2009. Alongside this we will no doubt see huge injections for green projects, along with tax cuts, stimulus vouchers, bailouts and funding to bring about training in the job market.
Moving forward – As long as there is no big second wave, everybody will be looking at how the recovery is going and what the expectations are for the next six months, rather than peering into the rear-view mirror.
The question becomes… as we get the economies back and demand returning, how will the debt be managed? Well… there are just a few ways in which that can happen.
- Agree to write it off – unlikely
- Inflate away the debt – unlikely ( the numbers are too large)
- Push it out – much more likely (one, two or three generations hence)
Maybe it is an amalgamation of all three?
Whichever way this is handled, inflation is likely to be low for quite some time. Against that background, for investors it is shares. Longer term, they are the growth engine, and will also be providing you with an income.