By Tom Wickers, Hottinger Investment Management
The Coronavirus crisis continues, tech took a tumble and perturbing party politics are three appealingly alliterate headlines that summarise the majority of September’s economic news. The month kicked off with a bang as the tech sector had a shake down that many saw as inevitable. Several stocks were heavily hit, Tesla fell 34 % and the NASDAQ fell 10% over the course of a week. American indices, which are notably tech-heavy, recovered somewhat but still ended the month in the red and the S&P 500 index was down 4% over September.
Big tech valuations have been noted as high for months by many investment houses and while many other analysts believe the prices to be justified, a spook in the form of Softbank was enough to instigate a sell-off. Softbank was found to have become very involved in the Big Tech call options market in an investigation conducted by the Financial Times at the start of September[i]. The private equity firm appeared to transform into a quasi-hedge fund following a strong move into public markets. The revelation worried investors as well as Softbank’s shareholders, analysts re-evaluated whether the tech sector had grown too hot, resulting in a sharp drop in prices.
Softbank has also featured in other news as it looked to sell its holding in Arm to NVIDIA. The UK chipmaker was long called a ‘crystal ball’ for investment research into the technology sector by Masayoshi Son, Softbank’s CEO. The clear change of focus by Softbank was originally received poorly by investors, however the share price recovered to end the month down just 2%. Should NVIDIA’s acquisition be approved by authorities, the merged entity would be a powerhouse in both artificial intelligence and computer microchips and would become a formidable player in the technology sector. In UK markets, HSBC received a rare bit of good news. The Eurasian bank, which has found itself in difficult financial and political waters this year, was heavily financially backed by Ping An Asset Management, one of its largest investors, on Monday[ii]. The share price rocketed 10% but was still down 49% year-to-date at the end of September. Incidentally the banking sector saw the largest decline of the month, down 7%, in contrast to the 4% experienced in the technology sector[iii].
A second wave of infections well and truly took hold in Europe. Spain instigated fears of a second wave back in July, and since then we have seen resurgences of new cases in France, Russia and most recently the UK. Earlier this week a sobering milestone of 1 million deaths was passed, with no end in sight for the pandemic. To add insult to injury for the markets, just this morning it has been announced that Donald Trump has contracted the virus, putting him and his family in isolation. The southern hemisphere and the USA battled to keep down infection rates while we enjoyed our summer, but an increase in the R number infection rate in multiple areas in Europe has raised concerns over the longevity of any economic recovery. Coupled with technology sector woes, global markets were left down 3.6% in September[iv]. Investors and households alike are keeping a keen eye on progress in vaccines, which are still thought to be the primary hope for the rejuvenation of societal norms. Johnson & Johnson’s product became the fourth global vaccine to enter Phase 3 of trials, meaning progress remains positive. Unfortunately, any realistic timeline for a vaccine is still protracted and mass vaccination is not forecast to occur until at least the second half of next year[v].
The UK was unable to cope with COVID-19 when it first reached our shores in March and has demonstrated similar incapabilities at containing this second surge. A 7-day moving average of new cases in the UK shows that authorities are reporting roughly 1,500 more daily cases than in the previous peak in May[vi]. Our healthcare system processes three times as many PCR tests as in May, meaning we are not yet at previous infection levels. However, on an exponential curve it will not be long. Boris Johnson has released a statement to say the UK is at a ‘critical moment’ with the Coronavirus[vii] and the ONS and Imperial College’s REACT have issued conflicting reports as to whether the R number is increasing or decreasing[viii]. The next few weeks will prove pivotal for the UK economic recovery.
September was touted as a decisive month for Brexit and an EU trade deal, both sides have previously stated that any deal would have to be finalised by mid-October. Little progress has been made and the large issues surrounding fishing waters and fair competition policies remain unresolved. The government has begun proceedings to renege on the withdrawal agreement made last year and the EU responded yesterday by initiated legal proceedings[ix]. To say that a Brexit deal appears unlikely is no overstatement at this stage.
The UK flash composite PMI figure came in lower than the August level at 55.7, which has continued the trend of a slowdown in economic recoveries in developed economies. The US flash composite fell slightly to 54.4, demonstrating slower expansion and the Eurozone’s figures were as low at 50.1, suggesting no growth. Last week, Rishi Sunak, the Chancellor, announced a Job Support Scheme stimulus package to combat the recent sour economic news[x], however the outlook for our economy continues to look grey at best.
The American election race began in earnest on Tuesday as Donald Trump and Joe Biden had their first public debate. It is safe to say that neither candidate impressed, both resorting to jibes instead of addressing political matters directly. Joe Biden is still thought to be favoured by 10% more voters than Donald Trump but there is sufficient uncertainty over majorities in swing states that Trump could still surprise on the 3rd November. The US economy showed some promising signs of growth as consumer spending rose 1.0% in August. On the flip side of the coin, incomes fell by 2.7% in the same month which could be a headwind for continued growth in the coming months. The next US stimulus package continues to be the subject of much speculation. Monetary and fiscal policies have underpinned markets since the crash in February and have proved a critical component of many short-term investment decisions in 2020. The Fed has already set expectations of near-zero interest rates through to 2023[xi]and has flooded the market with quantitative easing, leaving eyes predominantly fixed on fiscal stimulus. Democrats and Republicans are yet to agree on how large the relief should be and what it should be spent on, however, Democrats have recently proposed a $2.2trn package and investors are hopeful that it will be passed soon[xii], leaving the S&P 500 up 4.1% in the last week.
China’s economy has surprised investors with its resilience to the crisis since the beginning of the summer. By March, China had reduced its infection rate to near zero and has not yet seen a rebound in numbers. The result is that the manufacturing sector has been effectively fully restored, powering GDP growth. The Economist estimates that China is on track to hit annual growth of 5% in Q3, compared to 6% the previous year[xiii], making the crisis more of a stutter for development rather than the catastrophe other economies are experiencing.
At the end of August, the Fed issued a statement outlining its views on its inflation mandate. The central bank emphasised its plan to target average inflation. As mentioned in our strategy blog this month, JP Morgan Asset Management have pointed out that between 1994 and 2020, US average Core PCE only exceeded 2% over a three-year period[xiv]. This begs the question of how hot the economy will be allowed to burn. The key topic for economic analysis in September has therefore been whether we should expect inflation or deflation next year and going forward. Low economic activity resulting from the Coronavirus crisis clearly poses a headwind to the return of inflation, but on the upside, dovish central bank policies, incredible injections of money supply and deglobalisation all make the picture more believable. Whether it appears that inflation will feed through or whether economies suffer from Japanification will have significant implications for the positioning of portfolios and we expect to see the debate continue into the new year.
[i] https://www.ft.com/content/75587aa6-1f1f-4e9d-b334-3ff866753fa2
[ii] https://www.ft.com/content/5f6ca31f-310b-45e6-97fa-1db3bbcc8849
[iii] Absolute Strategy Research – Investment Committee Briefing 02/10/20
[iv] MSCI World figures https://uk.investing.com/indices/msci-world-historical-data
[v] https://www.cnbc.com/2020/09/15/there-may-not-be-enough-coronavirus-vaccine-doses-to-quickly-supply-the-world-gates-foundation-says.html
[vi] https://www.worldometers.info/coronavirus/country/uk/
[vii] https://www.bbc.co.uk/news/uk-54362900
[viii] https://www.bbc.co.uk/news/54296475
https://www.imperial.ac.uk/news/205473/latest-react-findings-show-high-number/
[ix] https://www.bbc.co.uk/news/uk-politics-54370226
[x] https://www.bbc.co.uk/news/business-54280966
[xi] https://www.nytimes.com/2020/09/16/business/economy/federal-reserve-interest-rates.html
[xii] https://www.ft.com/content/a7dd4408-2072-4e6e-b563-ded272a9ed35
[xiii] https://www.economist.com/finance-and-economics/2020/09/19/what-is-fuelling-chinas-economic-recovery
[xiv] Market Watch webinar held by Karen Ward and Myles Bradshaw on the 16th September 2020
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