Category: Uncategorized

By Tim Sharp, Hottinger & Co

Equity markets started October in buoyant fashion as retail investors, mutual funds and hedge funds alike put cash to work and bought the September dip. Yet, by month-end western markets were under pressure again as the second wave of the pandemic rolled across much of Europe. In the US, investors were concerned about the deadlock in stimulus talks and seemed less sure than the pollsters that a Biden-led “blue wave” would prevail. In the UK, Boris Johnson marked Halloween, a Celtic festival often associated with something more sinister than the beginning of winter, to announce a mutation of the March lockdown.

The initial positive sentiment in the US was driven by expectations that a Democratic sweep in the forthcoming election would lead to greater fiscal stimulus, and a belief that the US Federal Reserve would tolerate higher inflation before tightening. Meanwhile, with Q3 earnings season on the horizon, there was the usual opportunity for companies to beat carefully managed expectations.

In Europe, the central bank was expected to do more to support the recovery with additional asset purchases, probably under the Pandemic Emergency Purchase Programme. While, in the UK, there were signs that the Bank of England would loosen policy further after it asked the banks to provide information regarding their ability to implement negative rates without damaging their businesses.

Chinese markets were closed during the first week of October due to a lengthy national holiday but reopened to strong investor demand assisted by positive economic data. The Caixin China General Purchasing Managers’ Index showed activity climbed to its highest level in three months in September, while GDP expanded by almost 5% year-on-year; China could be the only major economy to record positive growth in 2020. By mid-month the total value of China’s stock market had risen to a record high of more than $10tn, thereby surpassing its previous peak of five years prior [i]. Ant Group dominated investor attention towards the end of the month as it became the largest initial public offering in global financial history breaking records in Shanghai and Hong Kong. It attracted orders of more than US$3 trillion (equal to the GDP of the UK) and was oversubscribed by almost 400 times, according to the South China Morning Post.

Demand for Chinese assets was not solely confined to the equity market; the renminbi traded at its highest level against the US dollar in over a year, despite the Chinese central bank lowering the cost of betting against its currency. In the bond market, Beijing received strong demand selling dollar debt directly to US buyers attracted by the superior yields versus US Treasuries.

The positivity surrounding Chinese assets helped the country’s equity market remain in positive territory for the month where other major markets failed, following a brutal final week in which fear surrounding the pandemic returned to markets.

The resurgence of the virus has been seen across Europe in particular, with national lockdowns in France and Germany, alongside local lockdowns in the UK. The US has remained open but with a record number of cases being reported, whilst Asia remains less affected at present. This sliding scale of severity was reflected in the performance of global equity markets over the month, with China and emerging markets gaining 2%, the S&P500 losing 3%, the FTSE100 giving up 5% and the Euro Stoxx 50 down 8%.

The equity market sell-off in the final week masked a broadly positive earnings season in both the US and Europe. Earnings beats across the two regions reached the highest level since 2009. Positive surprises were generally higher among cyclical stocks but there was earnings growth among the Defensives as well [ii]. Further, most companies reported an improved outlook based on a better-than-expected recovery during the past quarter. In addition, some companies expressed plans to reinstate their dividends, including HSBC, Credit Suisse and Royal Dutch Shell. However, within the technology sector the strong gains recorded so far this year brought high expectations, and companies including Apple, Intel, SAP and Twitter received a rude awakening when either, missing earnings, or simply not providing positive guidance.

For a second consecutive month, government bonds failed to act as an effective hedge against falling stock markets, with the US and UK 10-year yields rising by 19bp to 0.87% and 3bp to 0.26%, respectively. In the US, the long-end of the yield curve has been driven higher by expectations of a Democratic sweep that could usher in significantly more stimulus to support the economy, thereby pushing up inflation expectations and bond yields with them. The economic data has also been supportive of higher yields; the US economy expanded in the third quarter at its fastest pace in  post-war history as activity bounced back from Covid lockdowns.

The Gilt market was dealt a blow by Moody’s, which cut its investment rating one notch to Aa3 – equivalent to a double-A minus rating from rival S&P Global. The agency said it believed growth would be “meaningfully weaker” than it had previously forecast, and that the economy had been struggling even before the pandemic took hold [iii]. Certainly, the economic data during October backed-up Moody’s pessimism. The economy grew by a disappointing 2.1% in August and remains 9.2% below pre-pandemic levels in January. Meanwhile, consumer confidence, spending and mobility dropped in October while the number of people claiming out of work benefit has doubled from its level in March.

In commodity markets, gold fell marginally to $1,878 oz, thereby also failing to hedge against equity market volatility while Brent crude fell 11% to $37 a barrel in response to the expected hit to future demand from further lockdowns.

It is fair to conclude that markets ended October in a sombre mood and November is teed-up to be a pivotal month with ongoing Brexit negotiations and the US going to the polls. Yet, whilst the US election might be a source of further volatility in the short-term, especially if it is too close to call on the night, over the long-term elections typically have little impact on market performance, and a decisive outcome would remove a source of risk. Of greater importance could be any developments with regards to a coronavirus vaccine and, according to the biotech and pharma research team at Neuberger Berman, there could be some market-market-moving news on the horizon. They believe that both Pfizer and Moderna could potentially apply for emergency use authorisation (EUA) for their vaccines by late November/early December. Of course, “there’s many a slip ‘twixt the cup and the lip” but markets may not be pricing-in too much good news at present.

[i] ft.com – China’s stock market value hits record high of more than $10tn; October 14, 2020

[ii] Barclays – Lockdown 2.0 and final countdown to the election; October 30, 2020

[iii] ft.com – UK credit rating downgraded by Moody’s; October 17, 2020

[iv] Neuberger Berman – Moving the needle; October 26, 2020

 

 

plan it

 

plan it

plan it

 

plan it

By Laura Catterson, Hottinger & Co

We are a week out from the US presidential election and focus is on the electoral college.

When Americans cast their ballots for the US president, they are actually voting for a representative of that candidate’s party, known as an elector. Each state has a different number of electors based on the number of congressional districts they have plus two additional votes representing the state’s senate seats.[i] There are 538 electors up for grabs with 270 needed to win the presidency.

Most news outlets are positing that Biden is favourite with national and state polling showing that he has more pathways to 270 electoral votes than Trump.[iii] For Trump to clinch a second term, he will need to win a number of states where Biden is currently leading. These so called, “swing states”, are where the election is really decided.

If Biden wins these swing states with a considerable margin, he will be able to brush off any attempt by Republicans who challenge the results. However, if the margin is much closer, expect recounts, legal challenges, and a tense few days, weeks or even months. Thus, the electoral college map, and math, are very important.

There are fourteen states and two congressional districts which both campaigns are paying very close attention to. They can be grouped as follows:

The six swing states: Michigan, Wisconsin, Pennsylvania, Arizona, Florida and North Carolina

To understand the importance of these states, you need look no further than a recent NPR news report which shows that the Biden campaign and supporting groups have spent almost 90% of their money there, while Trump and Republican organisations have spent 78 cents of every dollar across the six.[iv] They hold such weight during each election due to their relatively even political divide, size and voting history. President Barack Obama won Michigan, Wisconsin, Pennsylvania and Florida in 2012 however, so did President Trump in 2016. North Carolina voted for Obama in 2008 but went Republican in 2012 and 2016. Arizona has notoriously voted Republican for decades and yet has been trending Democratic in recent years. Even a small victory in any of these swing states can have a huge impact on the overall result. In 2016, Trump won all six, three of which by less than a percentage point.

Florida (29 Electoral Votes [EVs]) and North Carolina (15EVs) are notoriously red-leaning however, Biden is currently leading in both,[v] albeit by a very small marginal average of one to three points.[vi] Michigan (16EVs) and Wisconsin (10EVs) typically turn blue and this year they appear to be following suit with Biden enjoying average nine[vii] and seven[viii] point leads respectively. Pennsylvania (20EVs) and Arizona (11EVs) are in the middle, yet Biden also leads both states with five[ix] and three[x] point advantages.

If these polls come to fruition, Biden looks set to win the presidency. If the race tightens, the margins in these six states are crucial.

Across all six, 101 electoral votes are on offer; of which Biden needs 38 – assuming all other states that typically vote Democrat do so. Following the same logic, Trump needs 66. Trump must win Florida and three others to reach this number. Biden, however, could reach 38 by winning Florida and just one of the other five states. Even if Biden loses Florida, he could also secure victory by winning Wisconsin, Michigan and Pennsylvania.

The two swing congressional districts: Nebraska’s second district and Maine’s second district

Maine and Nebraska diverge from tradition by allotting some of their electoral votes to the winners in each congressional district rather than the state-wide winner. Realistically, one of Maine’s two districts is safe for Democrats, and two out of Nebraska’s three districts are safe for Republicans. The remaining district in each state — Maine’s Second District (1EV) and Nebraska’s Second District (1EV) — is up for grabs. Crucially, these districts will only come into play if the race is neck and neck. One such scenario is if Biden wins Michigan and Pennsylvania while Trump takes Wisconsin, Florida, North Carolina and Arizona. As it stands, Biden leads by two[xi] points in Maine’s second district and seven points in Nebraska’s second district.[xii]

The states Trump is trying to defend: Ohio, Iowa, Georgia and Texas

Within these four states, Biden hopes for an upset. He is trying to win the traditional swing states of Ohio (18EVs) and Iowa (6EVs), both of which went with Obama twice but voted heavily for Trump in 2016. Current polling shows the candidates are pretty much tied[xiii] in each state.[xiv]

Texas (38EVs) and Georgia (16s) on the other hand, have not voted Democrat in decades. The margins, however, are shrinking. Trump is narrowly ahead in Georgia[xv] and on average three points up in Texas.[xvi] It would indicate a massive upset should these states flip.

The states Biden is trying to defend: Nevada, New Hampshire, Minnesota and Maine

Not to be taken for granted by the Democrats are Nevada, Minnesota, New Hampshire and Maine. Polling in Nevada and Minnesota shows Biden up by seven[xvii] and six[xviii] points respectively. Although Trump could make up some ground here, they are less likely to be as decisive as the main six swing states, hence there is some understandable optimism in the Democratic camp.

New Hampshire (4EVs) and Maine (2EVs) are far less competitive with polls showing Biden in double digits[xix] for both.[xx]

President Trump’s paths to 270 electoral votes are far more limited than Biden’s. As it stands, Trump’s prospects depend on late and fundamental shifts in the dynamics of the race. With both debates over and no consequential shift in the polls, re-election is looking tough. President Trump has proved himself however, as a candidate not to be underestimated. This race is far from decided and all eyes will be on the electoral map come 3rd November.

 

*Please note all polling stats were accurate at the time of writing.

[i] https://www.theguardian.com/us-news/ng-interactive/2020/oct/24/electoral-college-explained-biden-uphill-battle-us-election

[ii] https://ig.ft.com/us-election-2020/

[iii] https://edition.cnn.com/2020/10/25/politics/paths-to-270-analysis/index.html

[iv] https://www.npr.org/2020/09/15/912663101/biden-is-outspending-trump-on-tv-and-just-6-states-are-the-focus-of-the-campaign

[v] https://www.realclearpolitics.com/epolls/2020/president/nc/north_carolina_trump_vs_biden-6744.html

[vi] https://projects.fivethirtyeight.com/polls/president-general/north-carolina/

[vii] https://www.realclearpolitics.com/epolls/2020/president/mi/michigan_trump_vs_biden-6761.html

[viii] https://projects.fivethirtyeight.com/polls/president-general/wisconsin/

[ix] https://www.realclearpolitics.com/epolls/2020/president/pa/pennsylvania_trump_vs_biden-6861.html

[x] https://projects.fivethirtyeight.com/polls/president-general/arizona/

[xi] https://projects.fivethirtyeight.com/polls/president-general/maine/2/

[xii] https://projects.fivethirtyeight.com/polls/president-general/nebraska/2/

[xiii] https://www.realclearpolitics.com/epolls/2020/president/oh/ohio_trump_vs_biden-6765.html

[xiv] https://www.realclearpolitics.com/epolls/2020/president/ia/iowa_trump_vs_biden-6787.html

[xv] https://www.realclearpolitics.com/epolls/2020/president/ga/georgia_trump_vs_biden-6974.html

[xvi] https://www.realclearpolitics.com/epolls/2020/president/tx/texas_trump_vs_biden-6818.html

[xvii] https://projects.fivethirtyeight.com/polls/president-general/nevada/

[xviii] https://www.realclearpolitics.com/epolls/2020/president/mn/minnesota_trump_vs_biden-6966.html

[xix] https://www.realclearpolitics.com/epolls/2020/president/nh/new_hampshire_trump_vs_biden-6779.html

[xx] https://projects.fivethirtyeight.com/polls/president-general/maine/

 

plan it

 

plan it

plan it

By Tim Sharp, Hottinger & Co

Across developed countries there are signs that the recovery is slowing and the evidence of a second wave of the COVID-19 virus is likely to check the return to normal. September flash PMIs mostly held above the important 50 expansion figure, however, Services PMIs declined, especially in Europe where the reading fell into contractionary territory under pressure from growing new cases. Conversely, China seems to have weathered its own second wave quite well with statistics suggesting that domestic flights have returned to pre-COVID levels and consumer confidence seems to be growing[i]. The National Bureau of Statistics announced third quarter GDP grew 4.9% year-on-year and retail sales in September were up 3.3% from a year earlier. China is expected to be the only major economy to post positive growth in 2020 which could be good news for other countries in the region.

Although demand for capital goods continues to support the global recovery it is unlikely, in our opinion, that this can be sustained in the fourth quarter as fiscal stimulus is reduced and employment comes under pressure. The recovery has been uneven across countries and although the demand for goods and residential housing has been strong, the services sector remains severely depressed. There is a limit to how far the consumption of goods can substitute for lost consumption of services and the momentum looks likely to slow into the fourth quarter. Activity should start to level out after the post-lockdown bounce as localised lockdowns are introduced to help combat a second wave and the US Presidential election in November adds to uncertainty.

We believe the fundamental outlook for growth and earnings will be challenging for risk assets and, although valuations eased over the past month, growth stocks still hold historically lofty valuations and traditional value sectors remain in deep value territory. The equity rally has become increasingly concentrated, with Technology stocks the clear beneficiaries, while the stocks and sectors most affected by the pandemic are still significantly lower than pre-crisis levels. There have been attempts to rotate into undervalued assets during the recovery but the growing fears over the spread of new cases means such moves have not been sustained. However, it is difficult to see past equities as an investor with so many asset classes on stretched valuations. We continue to favour a cautious approach to equities based on valuation, cash flow, and the ability to navigate a changing landscape.

The level of support offered by government bonds in an environment of weaker equity prices has been somewhat compromised due to low yields. The extra premium offered by corporate bonds may therefore seem attractive even though they are historically tight. The US corporate bond markets have been supported by Fed purchases which have kept certain borrowers from default. However, the US High yield trailing 12m default rate was above 6% in August[ii], with speculation that it will move significantly higher over the next nine months as the recovery slows. It is our opinion that this plausible increase in the default rate is not properly priced into credit markets.

Some are calling this a K-shaped recovery because while there have been some spectacular winners equally there have been clear losers. We see that the hospitality sector is struggling to cope with social distancing and the industry employs many young people on lower incomes who have relied on government support to survive. Therefore, as emergency fiscal support is withdrawn, we would expect to see a score of people, who are currently listed as temporarily unemployed or on furlough, transition to full unemployment during the fourth quarter with its inevitable effect on growth.

It is difficult to see how the service industry will be able to recover under social distancing measures until a vaccine can be approved and mass-produced, but the efficiency of the vaccine will also affect the return of consumption to pre-COVID levels. With two frontline trials being temporarily suspended this week the path to approval remains as uncertain as always, but market sentiment seems to remain linked to vaccine news flow.

The full extent of economic scarring may become more evident as fiscal stimulus is tightened, negotiations between Republicans and Democrats seem to have hit an impasse that is unlikely to see a new US package agreed before the Presidential election. The markets are likely to remain volatile in the run up to the election with further anxiety over the possibility of a contested result. In our opinion the market has priced in a Biden win and Democrat “sweep”, which would be less likely to be contested, and the likely larger fiscal stimulus injection. This result would add further support to risk assets as it seems to us that a Trump victory would now see an adverse reaction by equity markets.

September was touted as a decisive month for Brexit and an EU trade deal because both sides have previously stated that any deal would have to be finalised by mid-October. However, little progress has been made and the issues surrounding fishing waters and fair competition policies remain unresolved. We have increased the risk of the UK leaving without a deal to high. Even if a deal can be struck, we expect the result to be minimalist providing little support to businesses, leaving the UK economy to suffer under significant levels of uncertainty.

Finally, the Fed’s move to average inflation targeting has substantially increased the inflation risk premium in markets even if the expected slowdown in the fourth quarter reduces the pricing pressures within real economies. We continue to favour the defensive qualities of commodities as one of the only asset classes to benefit from inflation. The recent dollar weakness has favoured emerging market equities particularly in countries that benefit from rising commodity prices. However, more recently the dollar’s safe haven qualities have seen it strengthen and the expected slowdown in the recovery will place pressure on emerging markets once more.

 

[i] Barclays Global Outlook – Glass Half Full – 24th September 2020

[ii] Absolute Strategy Research – Investment Committee Briefing for October – 02/10/2020

plan it

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 3^rd 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 16^th September 2020

plan it

plan it

 

plan it

By Andrew Butler-Cassar, Hottinger & Co

The banking and wealth management industry has grown over the decades built on trust and long-term relationships, and this traditional approach to people’s financial affairs has stood the test of time. However, with the rise of the machines in many sectors of our day to day lives you might be wondering why Amazon Bank or Google Wealth Management doesn’t exist already?

In this article we will explore what is and will likely be adopted in the wealth management industry in the short term and whilst at Hottinger we don’t speculate, we will finish with what the next gen expects.

Full automation supported by artificial intelligence (AI) has already started to infiltrate our everyday lives, often without us really knowing. Often quoted is the accuracy of healthcare analysis produced by a computer, but who wants an app telling you that you have a life-threatening disease! Whilst the machines can help us mortals deliver better results, we still want those results to be delivered with empathy, a trait the machine hasn’t mastered…..yet! However complicated the problems that take a team of mathematic scientists to answer, with a margin of error, quantum computing can solve. Furthermore,   AI can manage much of the mundane operational functions that are prone to human error. In larger retail banks that service retail customers, AI is now deciphering large amounts of ‘customer behaviour’ using algorithms to promote new products and services; “know your customer” just got a whole lot more mathematical !

Blockchain Technology is already in use in many banking transactions and billions have been invested in systems by some of the largest US institutions. A Santander report published in 2015 shows that banks and property management companies could save up to $20bn a year by late 2022. According to research by Roubini ThoughtLab, 225 out of the 500 wealth management managers it surveyed had incorporated the technology in some way. (1)

Furthermore, blockchain technology is expected to create multiple new classes of assets that  will become easier to own that currently cannot be settled and are subject to abuse. . For example, shares in collectibles and property could be verifiable and part ownership easier to manage and value.

Robo Advisors is an area written about so much already in the wealth sector that it has almost become passé. Many have tried and failed take Investec’s click n invest, or, UBS Smartwealth, millions spent but neither are commercially viable today. However, the sunk cost may not have been all lost. Over the last few years, Tiller Investments, a firm well known  to us, that began life as a robo advisor and white-labelled solution for other advisors, soon came to realise that in fact it was their architecture that they had built around onboarding clients that many other banks and wealth managers were interested in. Like any well run tech firm Tiller Investments understood the importance of the timing of adoption and the need to pivot when necessary. The beauty of the smaller new market entrants is that they do not have to deal with legacy systems and can design their architecture to be open making it easy to plug-in and integrate with current bank systems. The area of onboarding and compliance in general has seen millions spent on employing new staff that, instead, could be well served by new technologies working faster and more efficiently.

But will clients see the benefits of these early adoptions, afterall, none of this sounds like a flashy new portal or higher quality reporting, and is that really want clients want? Clearly faster and more efficient account opening is music to both wealth management firms and the client’s ears alike and the development of better analysis through AI and blockchain may well lead to better client solutions. However, where we have seen the greatest change in a short space of time is in the ability to spend more time with clients!

So what can clients expect from this technological revolution? A better relationship, communication and aggregated reporting appear high on the agenda. What type of relationship does a client want? Adviser led, technology led or a mix, to be determined as and when the client requires it? Clients have faster and more detailed access to their portfolios and multiple formats to contact their wealth manager including by, video conference, on-line chat, email, social media, or the good old fashion telephone. Achieving a full view of net wealth across banking, investments, debts, pensions and more has always been hard but this is changing quickly through changing regulation. “One place”, or, “One bank” are  slogans banded around by bankers and wealth managers who see the value in providing aggregation for ‘free’.

“Clients expect unique, tailor-made services suitable to their individual needs. They value modern, intuitive financial management platforms, available at any time via a phone or a tablet, but they still care for an experienced professional who will translate and explain the strategies proposed by the systems and help in making the decision. They are willing to pay a premium for such a combination of intuitive tools with an experienced personal adviser” says Patrik Spiller, Partner, Wealth Management Industry Lead at Deloitte Switzerland. (2)

And so, to the future. Generation Y, or the millennial, is not as loyal to service industries as Generation X, or Baby Boomer. Younger people would rather visit their dentist than their bank manager! We believe firms need to incorporate technology to be more engaging, instead of a list of boring questions to determine your risk profile, why not an online game? Gamification, already used in the insurance industry, could be one way to improve the dull reputation of wealth management, which often struggles to persuade us that asset allocation is at all interesting. But what us oldies might find even more surprising is that whilst brand loyalty isn’t everything, solid and considered advice along with an advisor making the effort to educate and be visible is still a need for the next generation. The matter of money is still a personal one and whilst that remains the case, people beat machines at the ‘inter-coal-face’ !

References:

1. Richtopia September 2020
2. Deloitte paper 2019: The future of wealth management. What will the financial ecosystem look like in 2030?

Additional Source material:

Raconteur – Four top uses of technology in wealth management – July 2019

 

 

plan it

plan it

 

plan it

By Tim Sharp, Hottinger Investment Management 

The pullback in major technology stocks at the beginning of September saw the NASDAQ reach 12,000 before retracing 11% in a week, giving the bulls an opportunity to implement the buy-on-dip strategy prevalent throughout the pandemic period. There is little doubt that “Tech” was expensive, having reached valuations not seen since 2000, so any weakness is healthy for general markets. However, the major questions that will potentially affect the real economy and financial markets going forward are whether the move by the Fed to average inflation targeting will increase the threat of inflation and whether the recent weakness in the dollar will be short-lived or a structural change in direction.

Following the mounting levels of fiscal and monetary stimulus, there is little doubt that the risk of inflation is firmly to the upside and recently, there were signs of a pick-up in inflation in the near term through a rise in US core Personal Consumption Expenditure (PCE) index in July, and US Purchasing Manager’s Indices (PMIs) in August saw input prices strengthen on the higher cost of raw materials. Conversely, the Eurozone core Consumer Price Index (CPI) weakened in August suggesting that inflation is weaker in Europe, and the fall in UK inflation was attributed to the “eat out to help out” scheme pushing down food prices. In the short term, it is unlikely that inflation pressures will build significantly when the future path of the recovery remains uncertain and this is shown by market expectations’ continued downtrend.

During a recent weekly “Market Watch” webinar, Chief EAM Strategist at JPMorgan Asset Management, Karen Ward, and portfolio manager Myles Bradshaw, forecast the effects of the Fed’s new average inflation targeting policy. They pointed out that between 1994 and 2020 US average Core PCE was only over the 2% target for the period of 2004 to 2007, suggesting rates are going to be anchored near zero for the long term if average inflation over 2% is to be achieved. However, a reactivation of fiscal support for economies, a continuation of the global recovery, and increasing central bank tolerance for higher inflation, does suggest that the threat of future inflation may be higher than current market indicators suggest, leaving the risk firmly to the upside. By association, therefore, markets are also susceptible to US 10-year Treasury yields moving back to 2% as opposed to falling into negative territory.

The low level of nominal yields on government bonds does mean that the ability to offset equity risk is diminished despite the negative correlation, and negative real yields mean that there is a cost to the risk-free rate once more. The low default rate in investment grade corporate bonds and the positive sloping yield curve is proving an attraction to investors seeking a real return without the risk of high yield bond investing, which has resulted in yield spreads over Treasuries tightening over the month.

When global growth starts to recover and US real yields fall, the combination often leads to a weaker dollar. The policy choices of whoever enters the White House after the election will be difficult with negative implications for the currency. The positive developments in the Eurozone, namely the establishment recovery fund and the more successful re-openings of its economies, have painted a positive backdrop for the Euro that may put further pressure on the dollar, even allowing for a second wave of the Covid-19 virus. However, long-term weakness in the dollar has its headwinds as foreign demand for the dollar continually exists to execute international trade and the USD continues to hold global safe-haven status as the world’s reserve currency. We have highlighted before that a weak dollar is very beneficial for international growth, particularly in developing economies but this may be more of a strong Euro story than a weak dollar story over the long term.

The UK government has passed the Internal Markets Bill which looks to over-ride parts of the Brexit Withdrawal Agreement at a time when negotiations over the EU-UK trade agreement were set to re-start. This could be seen as a high-risk negotiating strategy but seems to have significantly damaged trust to the point where the EU is threatening to seek legal assistance to uphold the treaty. Société Générale has raised the threat of no-deal to 80% probability and any deal that can be achieved of limited scope[i]. They estimate that this scenario will knock 3% off UK GDP in the medium term, which is the mid-point of the Bank of England’s own 2.5%-5.5% range to 2024, while only affecting the EU by 1%. Furthermore, Karen Ward of JPMAM believes a no-deal will see sterling weaken 10%. Therefore, the risk to sterling is once more to the downside in the short term which will probably once again prove positive for the large cap UK-based stocks with substantial overseas earnings.

Finally, we believe that a persistent inflation threat will need to see the strong recovery that we have witnessed so far in the developed world continue. However, this may be checked by a second wave of the virus and there remain concerns over the further levels of fiscal support that governments will be able to provide to fundamentally weak underlying economies. Regardless, the perception of an inflation threat can drive markets and a defensive position for investors could rely on the support gained from real assets such as commodities. Increased supply will possibly check the price of oil, but industrial commodities have seen higher prices over the last month. Few assets benefit from higher inflation but commodities usually do, offering protection as strengthening demand causes prices to rise. Furthermore, commodities tend to bear a negative correlation to stocks and bonds so are a useful addition to a multi-asset portfolio and may reduce overall portfolio volatility.  Gold also remains a useful diversifier for investors despite the rally year-to-date when real yields are so low and geo-political risks so high.

 

[i] UK Heading for No Deal – Brian Hilliard & Yvan Mamalet – 17/09/2020

 

 

plan it

plan it

 

plan it

By Robbie Hubbard, Hottinger & Co. 

For many of us in the UK this year, the term staycation has been a common theme, and this may well be the case for some time yet, especially going into 2021. Over the summer, the uncertainty from the Coronavirus pandemic meant that families opted for domestic trips over international breaks. There has therefore been a surge in UK holidays and bookings have already hit record highs, with cottages and campsites becoming a very popular choice.

Having recently returned from a trip to the coast and the Cotswolds, it was very apparent that our seaside towns and rural retreats appear able to shake the disease and life felt almost normal again, even for a brief while. It was a welcome break during such unprecedented times and an opportunity to appreciate the stunning shores and scenery on our very own doorstep, which is often overlooked in search of warmer climates.

In June, following Boris Johnson’s announcement to lift some lockdown restrictions on self-contained accommodation, many travel sites experienced record bookings; Hoseasons was reporting one booking every 11 seconds![i] With a vaccine still over the horizon, it is unlikely that holidays will return to normal next year, however, the UK’s tourism industry is much less dependent on international travellers than sunnier destinations. Even before the crisis, domestic travellers accounted for 81% of tourism in Britain compared to 53% in Spain and just 30% in Greece[ii].

Britain is one of a handful of European countries to have a tourism spending deficit which amounts to approximately €18.3bn[iii]. In other words, foreign visitors spend less on tourism in the UK than Britons spend abroad and staycation holiday substitutions could result in a much-needed boost to the sector. Statistics from Parkdean Resorts suggest that Britons spend £48bn on summer holidays each year, so with more holidaymakers staying within our shores  £8.24bn extra income for UK tourism could be produced, which equates to £900 per person.[iv] This will also likely largely be felt in the more local and vulnerable parts of the UK economy . Capital Economics write that if the entire £60bn that Britons usually spend on overseas holidays was to be spent onshore then GDP would receive a boost of 2.8% in 2020, offsetting the 1.3% lost from overseas visitors.

There is also evidence that tourism revenues are flooding away from cities to rural and less wealthy areas. The 2020 Staycation Market Report issued by Parkdean Resorts shows popular destinations such as Devon and Cornwall recording bookings up 86% and 33% respectively and the Isle of White up 40%. As a result, many key local destinations are extending their seasons in order to accommodate those looking to take late breaks. For example, Blackpool’s illuminations will be lighting up the seafront until January, and many campsites and holiday homes have extended the season by 4-6 weeks.v  Many Britons that are staying in the UK for their holidays for the first time in many years seem to be using the opportunity to revisit childhood memories of holidays past, returning to coastal towns and areas of natural beauty. On the other hand, the first port of call for foreign tourists tends to be city-based, namely London, Edinburgh, York, and the university towns of Oxford and Cambridge. Research provided by Springboard shows footfall in coastal towns was only down 24.4% in August compared to a year earlier whereas central London was down 64% over the same period and regional cities a slowdown of over 50%[v].

A sense of optimism shines over the UK’s tourism industry during a frankly bleak and unpredictable time. With trips abroad still remaining uncertain, Britons are instead staying closer to home, giving our economy a much-needed boost. Campsites and holiday parks are already seeing soaring bookings for next year, as families look to make the most of the summer holidays in 2021 and make up for lost time. Make no mistake, the statistics suggest domestic spending on holidays and day trips will still fall by half in 2020, down from the £91.6bn spent in 2019v, but tourist boards across the country will be looking to tempt the UK consumer into a well-earned staycation in 2021.

 

[i] https://www.standard.co.uk/lifestyle/travel/uk-holidays/staycation-booking-statistics-england-2020-a4479766.html

[ii] https://www.telegraph.co.uk/business/2020/04/30/britain-set-staycation-boom/

[iii] https://www.telegraph.co.uk/business/2020/04/30/britain-set-staycation-boom/

[iv] https://www.express.co.uk/travel/articles/1310111/uk-holidays-staycation-holiday-in-UK-destinations-devon-cornwall-isle-of-wight

[v] https://www.theguardian.com/business/2020/sep/05/uk-tourism-hotspots-extend-their-holiday-season-to-lure-more-visitors

 

 

 

 

plan it

plan it

 

plan it

By Tom Wickers, Hottinger Investment Management 

Last year, news channels continued to berate our eardrums with the 2016 word of the year; Brexit[i]. We experienced a somewhat oxymoronic year where headlines generally highlighted that there was no change and so, no news. Over the Christmas holidays, the withdrawal agreement was eventually passed through the House of Commons and the country came to its first unanimous agreement in a long time; to not discuss it again for as long as possible. COVID-19 has provided news anchors with alternative talking points but as summer has left us, Brexit has raised its ugly head again. Public discontent rescinded at the turn of the year, returning in part with COVID policy displeasure [Figure 1]. The government will likely be mindful to keep an eye on these figures as Brexit frictions return to the fore.

September is a big month for negotiations and strong rhetoric has already begun to mount. Today, ministers have announced that they are drafting legislation to remove arrangements made in the withdrawal agreement and Boris Johnson is expected to brief all parties that the 15^th October should be the deadline for any agreement. Time is short, yet large and stubborn divisions remain between the two sides and currently Michel Barnier and David Frost are busy playing the blame game, accusing one another of being unreasonable[iii].

Fishing waters aside, the sticking point revolves around sovereignty, put simply the UK wants it in full and that concerns the EU. The Conservative Party houses several powerful players, such as Dominic Cummings, who are keen advocates for independence and hence the government does not have much wiggle room on its position. The EU cannot agree any significant deal with a country in close proximity that is effectively threatening to compete on taxes, subsidies and ethics, or would risk undermining its member countries and existing trade partners. The rift is large and neither Mr Frost nor Mr Barnier seem willing or able to bridge the gap. To provide some context for the gamblers among us, bookmakers currently have the odds of no trade deal being agreed in 2020 at 4/7[iv] and the most likely scenario by some way is one with no delay and no deal.

The chance of no deal being agreed in 2020 is considerable and is getting larger. Should Boris Johnson stick to his word and not agree to a delay[v], lack of progress in the next two months will mean the UK separates from the EU on WTO trading rules. For some, it is a small price to pay for our sovereignty, for others it is a catastrophe that will cause many economic frictions going forward. There will be those who are confident in the UK’s ability to negotiate better economic fortunes in new geographies to compensate for the economic damage from loss of trade with the EU. Nonetheless, recent economic studies still provide an important base case scenario of what we may expect for our economy following COVID-19 and a no-deal Brexit.

The Bank of England (BoE) forecasts a 9.5% contraction in GDP this year as a result of the COVID crisis[vi], the likes of which we have not seen for 100 years. A blip from a no-deal Brexit has therefore been argued to be menial by some. Comparing the events over a longer term unfortunately yields different results. The BoE currently predicts the permanent scar from COVID-19 to be in the region of a 1.5% reduction in GDP[vii] from its long-term trend. Similarly, roughly half of the major economic forecasts for a Brexit with a WTO trading-scenario knock 2% off UK GDP in relation to a Free Trade Agreement[viii]. A combination of the two could have compounding effects as fiscal policy loses its spending power, resulting in a difficult road ahead for our economy.

Tough talk is a must when trying to negotiate a good deal. Nevertheless, the increasing risk of no reconciliation will have many economists flustered. The government and UK economy may yet surprise the majority of forecasters with impressive foreign policy and innovation, but the base case is dour. We will be keeping a close eye on the negotiations in the coming weeks, beginning with the eighth-round tomorrow.

 

[i] https://www.collinsdictionary.com/word-lovers-blog/new/top-10-collins-words-of-the-year-2016,323,hcb.html

[ii] https://whatukthinks.org/eu/questions/how-well-or-badly-do-you-the-government-are-doing-at-negotiating-britains-exit-from-the-eu/

[iii] https://www.ft.com/content/f798a3a0-1ce3-4082-8780-6f172f70779e

[iv] Odds taken as of 07/09/2020  https://www.oddschecker.com/politics/brexit

[v] https://www.foxnews.com/politics/boris-johnson-brexit-delay-coronavirus

[vi] https://news.sky.com/story/coronavirus-uk-to-nosedive-into-recession-after-covid-19-triggers-record-slump-12047281

[vii] https://news.sky.com/story/coronavirus-damage-to-economy-may-be-worse-than-feared-bank-of-england-rate-setters-warn-12061817

[viii] Original source: Institute for Government. Assesses only the economic houses that provide predictions for both a World Trade Organisation trading scenario and a Free Trade Agreement trading scenario. https://www.ft.com/content/4440f83d-7e8a-4510-b8b7-3fb9146da51a

plan it

 

 

 

 

plan it

plan it

By Kevin Miskin, Hottinger Investment Management 

In a month when the highest ever temperature on earth of 54.4 degrees celsius was recorded in Death Valley, California, demand for technology stocks across the way in Silicon Valley continued to heat up.

The five big technology platforms—Alphabet, Amazon, Apple, Facebook and Microsoft— all posted double-digit gains to help drive the Nasdaq higher by 9.6% during August, thereby outperforming the broader S&P500 (+7.0%) and the MSCI World Index (+6.5%). Apple reached a market capitalisation of $2trn, the first American company to do so. It took 38 years for the company to reach the $1trn mark and just two years to double that, according to Barclays.

Strong demand for technology stocks has sparked the IPO market back to life in a flurry of activity not seen since the dotcom bubble.  ‘Unicorn’ companies reportedly filing for IPO include Airbnb, Snowflake Computing, DoorDash and Instacart. Add-in Palantir, a cryptic data-management firm preparing for a direct sale, and the estimated valuation of these five is $80bn, according to PitchBook [i]. Yet, none of Silicon Valley’s upcoming listings rival that of Ant Group, the payments arm of Alibaba, which has cried ‘open sesame’ to investors’ wallets with plans to raise a record $30bn, which could value the firm at around $200bn.

With the IPO market resurgent, the Nasdaq having gained almost a third year-to date and the S&P500 making all-time highs, there has been talk of whether the equity market is in the realms of “irrational exuberance”. Certainly, there has been a lack of breadth to the recent rally; the five big technology platforms having accounted for a quarter of the S&P500’s rally since March. They also represent more than a fifth of the index, the biggest weighting for the top five since at least 1980. Notably, the majority of S&P 500 constituents are still below their levels when the market last peaked on 19th February.

In terms of valuation, US stocks are now priced at more than 22 times forward earnings, according to FactSet, representing levels not seen since the dotcom bubble burst two decades ago. Yet, the composition of the S&P500 index has changed considerably since 1999 when its largest components consisted of GE, Exxon, Pfizer, Citigroup and Cisco. Therefore, it is not surprising that the shift to high growth technology stocks has resulted in a higher valuation. Further, as a result of the sharp decline in bond yields, US stocks compare well on a relative basis; the earnings yield on US stocks is 3.8% versus a yield of 0.7% on the 10-year US Treasury, representing a gap slightly above the long-term average [ii].

With the dust having settled on Q2 reporting season, earnings revisions have turned positive according to Barclays Bank, which has also buoyed investor confidence. Greater visibility from the impact of Covid-19 has led to a slightly improved tone from companies. Cost cutting coupled with nascent signs of an economic rebound should help the earnings recovery during the rest of the year, so the theory goes. Nevertheless, weekly initial US jobless claims rose back above one million for two consecutive weeks at the end of August and the recovery in mobility traffic and other high-frequency indicators has eased. Further, the Vix volatility index has decoupled from equity markets, which has previously been a signal of trouble on the horizon [iii]. Therefore, we retain some caution.

Whilst US stocks ended August in positive territory for the year, most other equity markets remain negative. European stocks gained 3.1% during the month but remain under water by 11% for 2020. The German Dax Index has been exceptionally resilient, briefly turning positive during August, assisted by strong returns from technology stocks Infineon and SAP, together with logistics company DHL Deutsche Post.

Japanese stocks gained 8.2% during August, despite suffering a set-back at the end of the month, following the resignation of prime minister Shinzo Abe due to ill health. During his eight-year tenure, the Topix index has produced a total return 85% in dollar terms, underperforming the S&P 500 but significantly outperforming both the MSCI Europe and MSCI Emerging Market indices. Since Mr Abe’s election, the dividends of Japanese companies have doubled and buybacks have quadrupled, according to Jefferies [iv]. Japanese stocks could be fragile in the short-term until Abe’s successor is instated but initial market consensus is that some form of Abenomics will ultimately prevail.

The FTSE100 index (+1.1%) was the laggard among the major indices in August, held back by the Oil & Gas and Banking sectors. Whilst it was a quiet month for earnings reports, HSBC unveiled an almost seven-fold jump in reserves set aside for bad loans and a steep drop in Q2 profits.

FTSE100 companies, which make two-thirds of their earnings from abroad, were not helped by the strength of sterling which gained 2% versus the US dollar to 1.3353 and 1% versus the euro to 1.1215. Although the UK economy suffered one the sharpest falls in gross domestic product (GDP) among the developed economies in Q2, recent data suggest it could experience a record-breaking recovery in the current quarter. City of London economists forecast GDP will rise by 14.3% in Q3, which could result in the UK moving to the top of the G7 performance table, having propped it up in Q2. The rebound is being driven by the consumer; according to the Office of National Statistics, retail sales in July were 3.6% higher than June and an improvement from a year earlier. Of course, several factors could impede the recovery, not least the winding down of the furlough scheme and a second wave of the virus.

Increased optimism surrounding economic growth not only lifted equity markets but sovereign bond yields as well. The benchmark 10-year bonds yields in the US and UK rose by c. 20 basis points to 0.72% and 0.31%, respectively, and marked their highest levels in two months.

The main development in the fixed income market came from the annual ‘Jackson Hole’ economic symposium. US Federal Reserve Chairman, Jerome Powell, announced that the US central bank will tolerate higher inflation in future as part of its longer-term review of monetary policy. This is a significant development as, in effect, the Fed will now target an average rate of 2% over time allowing it to run with a rate above 2% to compensate for periods when it has been below [v]. As a result, short-term rates should remain lower for longer and the yield curve should steepen, which could be a catalyst for value stocks to outperform in equity markets. Further, if borrowing costs are going to remain anchored and the Fed is encouraging inflation, then the real cost of debt will be eroded which should encourage corporate America to raise capital expenditure.

Of course, inflation would need to pick-up first and only once in the past five years has the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures rate, risen above its 2% target. Nevertheless, the Fed has made its intentions clear and we will watch closely.

 

[i] The Economist – Initial Public Offerings are back in Silicon Valley; August 22, 2020

[ii] FT.com – The uneven rally that took US stocks to a record high; August 18, 2020

[iii] The Felder Report – The VIX is raising a red flag for the rally; August 26, 2020

[iv] FT.com – Investors in Japan lament the departure of ‘Abenomics’ architect; August 28, 2020

[v] Axa IM – Word up; August 28, 2020

plan it

 

 

plan it

plan it

By Alastair Hunter, Hottinger Private Office

The travails of the health and education sectors have been well tabulated through the myriad of media outlets since the onset of the Covid 19 pandemic with a bright light shone on the challenges that the staff and users have faced.  Clearly, these sectors have borne the brunt of this terrible virus.

That said, the impact of the virus extends across the economy and has been keenly felt in the hospitality sector, a sector that in all probability touches us on a daily basis, with potentially long-term ramifications for the well-being of our nation.

If you travel into the centre of any village, town or city, a number of once thriving and bustling eateries, bars, coffee shops and the like simply aren’t trading any longer.  As someone who has worked in London for over 20 years and was always struck by the buzz of our thriving capital city, it has been a vastly restricted city both during and after lockdown.

I am sure this is the same up and down the country. It prompted me to think about how much time I spent frequenting the hospitality sector, for business, family or wider leisure time.

It was quite interesting to look at the different definitions for the hospitality sector – the one I liked was “a range of businesses and services focused on leisure and customer satisfaction”.  Leisure and satisfaction are fundamentally important to us all. As social distancing restrictions have been imposed across society for sound scientific reasons, they have hugely curtailed the ability of the hospitality sector to service our leisure needs.

More than ever we require and desire a sense of escapism that the hospitality sector in part provided. Not only has the sector benefited us all as consumers, but it has also become a major cog in our economy. It surprised me greatly to learn that the hospitality sector by certain estimates is the 3rd biggest employer in the UK, accounting for 3.2m jobs through direct employment in 2017, and a further 2.8m indirectly. The industry generated over £72bn directly to the UK economy, and a further £86bn indirectly[i].

The multiplier effect is a well-known concept within economics, and my suspicion is that the hospitality industry is a key industry for the morale and discretionary spending across the nation. A 2015 study by Oxford Economics suggests that for ‘every £1 million the hospitality industry contributes to GDP itself; it creates another £1.5 million elsewhere in the UK economy’[ii]. Given that it is concerning to see some of the reports over the recent weeks about the lack of velocity of money and low consumer confidence.

On the assumption it has been a difficult time for us consumers, one can only imagine what it has been like for staff and owners of businesses across the sector. What has life been like for the expats, here to work in the bars and explore our great country? The student using the hospitality sector to supplement their studies, or the talented and passionate specialists in the sector working crazy long hours in the establishments, furloughed at best, with their long-term future uncertain and unknown.

Some political credit seems to be due to Rishi Sunak and his “eat out to help out” scheme – as with many political decisions of late, it was largely treated with scepticism across the media but if the figures from Barclaycard and others this week are accurate this would seem to a very well-aimed shot in the arm for a sector that has been very hard hit[iv].

But more needs to be done, as this wonderful weather which has by and large prevailed over the lock down period, won’t last forever ( I think I can be confident of saying that!) and the outside spaces that allow for people to eat drink and be merry in a socially distanced manner will be vastly curtailed as we enter the autumn and winter months.  Even if, and that is a giant if, there is a vaccine coming to market the likelihood of it being widely available during 2020 is low.  Therefore, the hospitality sector faces a sustained period of pressure.  Let’s hope all the political groups can put their thinking caps on and find more successes like the eat out to help out scheme. 35 million people and counting seem to have taken up the opportunity and it is a much-needed stimulus.

Will that 35m people be enough of a catalyst for investors to re-engage with the sector though?  It’s clear the sector is in urgent need of funding and beyond that, many owners will need to show resilience and crisis management skills. Surviving businesses will be those quick to adapt their business models to meet the demands of service in an era of social distancing.

 

[i] https://www.ukhospitality.org.uk/news/408996/130-Billion-hospitality-sector-celebrated-at-inaugural-conference.htm

[ii] http://www.bha.org.uk/nas/content/live/hottingergroup/wp-content/uploads/2015/09/Economic-contribution-of-the-UK-hospitality-industry.pdf

[iii] https://www2.deloitte.com/uk/en/pages/consumer-business/articles/consumer-tracker.html

[iv] https://www.bbc.co.uk/news/business-53699595

 

 

 

plan it

 

 

plan it

By Tim Sharp, Hottinger Investment Management

At the height of the summer, markets tend to become a little more volatile because of lower trading volumes and our thoughts turn to what is on the horizon. 2^nd quarter earnings saw US companies outperform Europe and mega-tech continues to lead markets. The mix of traditional companies and new probably explains this phenomenon rather than any overriding policy success by the Trump administration. The outperformance of mega-tech can probably be attributed to its many facets – providing the investor with companies that have benefitted from the pandemic lockdown; consistent long-term growth outperformance; significant cashflow generation and minimal debt. The combination of superior growth and defensive qualities has led many investors to continue to support the sector despite expensive valuations.

Conversely, the performance of Europe as it re-opens has caught the attention of investors and may be the catalyst for a rotation into more traditional sectors. Europe went into a strict lockdown that likely resulted in the underperformance in the 2^nd quarter. Policies that have kept workers employed, rather than on subsidised unemployment benefits, have allowed for a stronger re-opening; populations are higher in confidence and more likely to consume and so business confidence has also bounced back strongly. Efficient track and trace systems have allowed for better control of secondary outbreaks such as the latest global increase in new cases. Furthermore, the political agreement on the EU Recovery fund should provide a more stable and predictable platform for monetary and fiscal stimulus instead of meeting resistance at a national level. The banking system remains the backbone of corporate lending in Europe unlike the US where the bond markets are more accessible to small and medium sized firms. Therefore, banks remain key to a sustainable European recovery and, as Absolute Strategy Research (ASR) write, European banks will need to remain good investments[i].

The US Federal Reserve has successfully provided the corporate bond market with support which is probably the reason why high yield and investment grade spreads have not widened in line with the tightening in US bank’s lending standards to corporates, despite an increase in the default rate. This suggests that many companies are being propped up by cheap lending when perhaps their solvency should have been brought into question, creating yet another signal that is being masked by central bank or government intervention.

The rally in gold this year to a peak over $2000 /oz started due to the metals safe haven properties but with near zero interest rates in most of the developed world, a significant drop in inflation rates and, most recently, a depreciating dollar, the gold price has continued to strengthen as an alternative to bonds. But, now that there has been an increase in inflation expectations due to the significant levels of stimulus pumped into economies, the main danger with this strategy is that gold has no protection from inflation either, so when inflation does come back gold may well react in a similar way to equities.

The dollar saw its worst month for about a decade in July losing 4.15% having slowly depreciated against most developed currencies since March. Coupled with the nascent signs of recovery in air freight and shipping container volumes this would point to early signs of a recovery in global growth. Before the pandemic we were exploring the drag on the recovery in global growth caused by a strong dollar, so it is probably no coincidence that this has occurred particularly in Asia where China looks to be the only country to post positive growth in 2020. In March we witnessed the safe haven qualities of dollar ownership at times of stress so we are reluctant to turn away from the dollar when the worst of the pandemic lockdown may yet come to pass as government support starts to be lifted over the coming months.

Judging by recent growth statistics, the UK economy has performed poorly compared to other G7 countries due to a mixture of uncertainty regarding European trade talks and the UK government approach to the pandemic continuing to cause concern. This can also be attributed to much of the UK economy being service sector focused rather than manufacturing. Large swathes of the UK economy remain closed especially in the hospitality, tourist, and entertainment sectors and over 6 million remain furloughed. This has also translated into similar poor returns from UK financial assets leaving them a drag on global, multi-asset portfolios. The UK main indices are also overweight with oil, mining and banking stocks which remain unloved, deep value plays. There are some good UK companies performing very well in growth sectors, but it takes good stock-picking to build a highly valued portfolio rather than passive, index investing.

Finally, we believe that it is unlikely that the world will return to its pre-Covid position and that a new normal will prevail. We have previously commented on the lack of collaboration during the Covid-19 outbreak and we believe that countries will become increasingly isolationist. Should President Trump win a second term, which is an outcome less explored by investors than a Biden win, then it is likely that relations between the US and China will cool further, with the likely complication of competing standards regulating different industries and its inevitable effects on global growth. ASR believe it is also likely that supply chains will shorten, moving from being cost conscious to security conscious[ii]. Companies could look to primarily guarantee production lines rather than cost efficiencies, which may have material effects on the future growth of emerging markets. We have also just witnessed the politicising of a vaccine with the announcement by Russia of the success of their Sputnik 5 Covid vaccine. If successful vaccines are offered in the near future, there is therefore the possibility that they may not be accepted globally without other countries undertaking their own testing. For example, in the current environment it seems unlikely that the US would trust a Chinese vaccine, regardless of how genuine and transparent the testing results are. This was recently referred to by the World Health Organisation as “vaccine nationalism”[iii], and as such, it is probably a good thing in this increasingly isolationist world, that there are so many Covid vaccines being tested globally if it is to be working vaccines that offer the best chance of countries returning to normal activity levels once more.

 

[i] Absolute Strategy Research – “Banking” on Eurozone Equities – August 6, 2020

[ii] Absolute Strategy Research – Investment Committee Briefing – August 7, 2020

[iii] https://www.msn.com/en-gb/money/technology/who-chief-concerned-about-vaccine-nationalism/vi-BB17VKrl

 

plan it

By Kevin Miskin, Hottinger Investment Management

July offered a something for ‘glass half full’ and ‘glass half empty’ investors alike. Politics scored highly for those of a pessimistic disposition as tensions rose between the US and China. President Trump openly expressed his increasing anger with Beijing, which culminated in consulates being closed in both countries as part of a tit-for-tat spat. Matters could deteriorate further in August if the US government calls time on Microsoft’s acquisition of TikTok, having already accused it of being a conduit for Chinese state-sponsored spyware [i]. Meanwhile, Brexit negotiations rumbled on with seemingly little progress, particularly on how to ensure a “level playing field” and access to British fishing waters. In an effort to accelerate the stymied talks, Boris Johnson had called for the two sides to “put the tiger in the tank” — a throwback to the old Esso petrol adverts, but maybe Michel Barnier and his cohorts are driving BWM i3s and Renault Zoes, metaphorically speaking.

Brexit to one side, the EU’s 27 national leaders found fiscal unity, albeit after arguably the coalition’s longest ever summit, to agree the EUR750bn “Next Generation EU” (NGEU) fund to help countries recover from the Covid-19 recession. Most leaders could claim to have gained from the talks; the French and Germans saw their plan approved, the southern states should receive funds worth several points of GDP and the so-called “Frugal Four” countries of The Netherlands, Austria, Sweden and Denmark won concessions [ii]. Symbolically it was a historic moment, similar to that of Mario Draghi’s pledge to do “whatever it takes” to save the euro.

Understandably, the pandemic continued to influence the economic data. The US Federal Reserve (Fed), for the first time in its official statement acknowledged the virus would significantly influence the fate of the US economy [iii]. The closely watched weekly US unemployment claims, which had shown a consistent improvement since March, started to rise in the latter part of the month as the death toll started to rise again. The US also reported its largest contraction in post-war history as the economy shrunk by 9.5% during the second quarter. In Europe, where it is widely considered that the virus has been handled more effectively, the GDP reports were similarly stark. The German economy shrank by 10.1% in the second quarter, thereby wiping out ten years of growth according to Berenburg Bank, while France contracted by a record 13.8%.

In the UK, chancellor Rishi Sunak delivered a “summer economic update” in which he announced £30bn in new measures, equivalent to 1.4% of pre-crisis GDP, for the current financial year. His plans included a £2bn KickStart scheme to provide six-month work placements for the young unemployed, a much-needed cut in VAT for the leisure and hospitality industries and an “Eat Out to Help Out” scheme aimed at helping pubs and restaurants. By and large, commentators were underwhelmed. For example, Pantheon Macroeconomics believes that £30bn will be insufficient to “fill the void” when the furlough scheme ends in October. Yet, it was not all ‘doom and gloom’ as retail sales recovered far more strongly than forecast in June, according to the Office for National Statistics, and Bank of England Governor Andrew Bailey remarked that there were signs of activity returning “quite strongly” in the housing market and in new car sales [iv].

One area of the world that has returned to growth is China where GDP expanded by 3.2% in the second quarter, thereby providing the earliest signs of recovery from the fallout of the pandemic. Nevertheless, on balance the global economic backdrop remains challenging, not helped be emerging signs of a second wave towards the end of the month.

The US dollar, often viewed as a safe-haven currency, dropped more than 4% against a basket of other currencies to post its worst monthly performance in a decade. Several factors are weighing on the ‘greenback’ including outbreaks of the virus in key states (including, California, Texas and Florida) and the upcoming election where Democratic candidate Joe Biden has a commanding lead in the polls. In addition, the euro has gained traction because of the recovery fund mentioned above and other parts of the world are showing nascent signs of recovery. Does all this mean the dollar is under threat as a reserve currency? We suspect not just yet, as it was only four months ago that investors flocked to the dollar for safety.

Meanwhile gold, referred to the currency of last resort recently by Goldman Sachs, gained more than 10% to reach an all-time high. The combination of lower real yields and a softer dollar has provided the perfect backdrop for a major rally in the yellow metal. Some investors are also purchasing gold as an inflation hedge, taking the view that at some point global economies will recover from the pandemic and central banks will allow prices to rise to reduce their debt burden. Nevertheless, talk of inflation was lost in government bond markets as concerns regarding growth resulted in even lower yields; the US 10-year yield edging lower to 0.53% and the benchmark UK gilt yield falling to 0.10%.

With risk-off assets in the ascendancy, it was somewhat unusual that risk-on assets also recorded healthy returns in July. US junk bonds had their best month in nearly nine years as the average yield fell below 6% [v], despite the number of defaults in H1 having exceeded the total for the whole of 2019, according to Moody’s. Further, Moody’s expects the default rate to almost double from current levels, before peaking at 9.6% in Q1 2021, with bankruptcies likely to be concentrated in the Retail, Oil & Gas and Leisure sectors.

Global equity markets appreciated by 4.7% buoyed by a positive US earnings season and nascent signs of a recovery in M&A activity.  Yet, a deeper delve into geographic and sector returns revealed a more mixed picture. China (+12.8%) and the US (+5.5%) led the way while Europe (-1.8%), Japan (-4.0%) and the UK (-4.4%) posted losses. The Chinese market enjoyed strong gains after a widely read, state sponsored securities journal told investors to expect a “healthy bull market”. Investors also reacted positively to news that the benchmark Shanghai Composite index is to be rebalanced with a greater bias towards technology stocks.

Reporting season started in earnest for S&P500 companies. The bar was set low with aggregate earnings expected to decline by 44%. Yet, with 60% of companies having already reported, earnings have exceeded forecasts by 23% and Q2 is on track to record the largest earnings surprise since FactSet records began in 2008 [vi]. Technology and consumer discretionary stocks dominated the positive reports as the main beneficiaries of the surge in online consumption and service provision. In addition, a study by Credit Suisse conducted during earnings season concluded that some of the largest US multinationals have continued to buy back shares despite expectations to the contrary following the pandemic, thereby adding a further support to the US market.

Once again, the UK was one of the worst performing markets, dragged down by the Banking, Oil & Gas and Telecom sectors which suffered from disappointing company earnings. Of note, Royal Dutch Shell reported an 82% decline in net income while Lloyds Bank, considered to be a UK bellwether, adopted a more pessimistic stance on the UK economy than when it reported three months ago.

 

[i] bbc.co.uk – TikTok: What is the app and how much data does it collect?; August 3, 2020

[ii] The Economist – The EU’s leaders have agreed on a €750bn covid-19 recovery package; July 21, 2020

[iii] ft.com  – Fed warns resurgence of virus threatens economic recovery; July 29, 2020

[iv] Barclays Bank  – Morning Briefing; July 20, 2020

[v] ft.com  – US junk bonds notch up best month since 2011; August 1, 2020

[vi] FactSet  – S&P500 Earning Season Update; July 31, 2020

 

 

 

 

 

 

 

 

 

 

By Andrew Butler-Cassar, Hottinger Private Office

So we have another three letter acronym to get used to, no not my initials but WFH, ‘working from home’. Some will wonder what all the fuss is about, as working remotely, as it is otherwise known, has been an everyday occurrence. In the blink of an eye, lockdowns ordered, we became work from homers, when once remote working was stigmatised in the office, with quips about ‘working from the sofa’ or “oh yes they are ’working from home’ today” with often exaggerated speech mark hand signals. Now I realise I need a new chair for my workspace and everyday feels like Tuesday. This article explores our new ‘acceptance’ but asks what are we actually willing to accept and will it last?

I don’t think there are many that would deny it was quite a novelty working remotely. No early morning alarm clock, no rush to the station for the commute to work and wow, the money we’ve saved from not buying the expensive coffee and a wildly over-priced sandwich from the local café at lunch. Clearly our savings, of course, have been someone else’s business crisis. The cost of the pandemic in both human terms and economic has been well documented, but I can’t help thinking that most of us have enjoyed the initial change of pace.

Without for a moment wishing to belittle the seriousness of this ongoing pandemic and how grateful we are to those on the frontline, being at home brought out many firsts for us all. Until the pandemic, I thought Zoom was Fat Larry’s greatest hit!  Virtual quizzes and curry nights, the ease with which family members or friends could be in contact with you perversely meant more contact, not less in a lockdown. In fact, I wonder if ten years ago, well maybe 5 years ago, we would have been able to adapt so easily to working from home? We have much to thank our technology for. Beyond the initial happiness connections brought via all manner of video conferencing apps, what has been the effect on a normal working day? Communication in our line of work is crucial, none more so than in times of increased volatility, and whilst some competitors used WFH as an excuse to be less communicative, we jumped at the opportunity to connect more frequently because our clients adopted the technology seamlessly. A recorded video call to discuss markets and/or review recent advice has now become an acceptable additional medium but we don’t believe it should substitute good old-fashioned face to face contact. Anecdotally, as an advisor our personal lives, or shared moments, are what strengthens a client/adviser relationship over many years. Thinking back to sharing the news of the birth of my first child with my long standing clients brings it all very much to life when that new born child you spoke of so fondly now walks into your conference call, sixteen years later asking, or should I say grunting, for money to go shopping! We both chuckled at what was clearly a moment they had endured themselves with their own children and I think it is these moments that strengthen the relationship beyond the quality of the advice given.

Although many businesses have coped well during the pandemic, there are some obvious exceptions. The leisure and tourism industry has been decimated, you can’t go on holiday via a conference call, you can’t go to the theatre, live gigs or nightclubs (thank you NT Live et al for the culture we are enjoying via YouTube but we all want our Arts back to normal as soon as possible).

However, most of us would also agree that working remotely has not meant less productivity in fact it has been quite the opposite. So, if this is the case why have we not adopted this sooner? Nicholas Bloom, a professor at Stanford University in California thinks the attitudes around working from home are finally changing[i]. In his experiment in 2013, Bloom worked with the Chinese travel company Ctrip, to study remote-work productivity. Somewhat to Bloom’s surprise, the company’s staff became notably more productive by working from home four days a week. 13% more productive. Now, six months into the global pandemic, an increasing number of companies are asking: should they work from home indefinitely? And if they do decide to make major organisational changes about remote work, could they see similar leaps in productivity?

Whilst businesses are assessing the rise or fall in productivity, are they in equal measure concerned about the effect a substantial change in working habits will have on the mental wellbeing of their staff? If working from home becomes the new normal you may never see your work colleagues again except for the virtuous circle of videoconference calls, and give it time, our faces will be replaced by Avatars. In my case the team will be delighted by that development, equally think of the money I could save on haircuts!

Whilst it is ok to look for the humour in what has been an unprecedented time (impossible to talk about the past five months without the phrase unprecedented time) at Hottinger we are taking this seriously. As with many firms, morning meetings to ensure we check in with each other to see how we are coping are important, but we are all eager to get back something we have lost, ‘office banter’. The importance of human interaction between colleagues is not to be dismissed lightly, some of our team, particularly those who are younger and living alone have been very honest about the need for an office environment. Serendipity is important: bumping into people, seeing people in the corridor. Quite a lot of the ways that we make decisions in organisations aren’t made in meetings they’re made in the corridors. Yes, the newly created “12-month Barbados Welcome Stamp,” to be free to work on the island looks very appealing, but at Hottinger we believe our type of business requires an office-based approach to working.  However, WFH is not only acceptable but encouraged when members of staff feel it will be more productive, all you need for this to work is trust, a characteristic we live by at Hottinger.

[i]Article – Remote Control BBC Website – https://www.bbc.com/worklife/article/20200710-the-remote-work-experiment-that-made-staff-more-productive

 

 

 

plan it

By Tim Sharp, Hottinger Investment Management

The continuing rally in risk assets continues to feel out of step with our view that growth and earnings have been fundamentally impaired by the pandemic lockdown. There have been a lot of theories for this phenomenon including lower summer trading volumes and an increase in retail day traders missing the opportunity to bet on sports. It is interesting that retail names such as Tesla and Amazon continue to lead US equity markets with Tesla becoming the world’s largest carmaker by market capitalization, overtaking Toyota despite only creating 500,00 cars a year! It is difficult to justify such lofty valuations even with the significant dispersion between winners and losers, or growth and value.

Absolute Strategy Research (ASR) points out the relative expensive state of US equities in general; US equities are on a 60% PE premium to the rest of the world and are trading on a price-to-book ratio that is also 2.3 times higher. Over the last week the Nasdaq 100 which is heavily laden with technology stocks has seen a significant outflow of funds which may indicate that short term investors are also considering the technology leaders to be looking expensive. Current data would indicate that the US is seeing a significant spike in new virus cases, particularly in the more populated states. Although fatality rates are not rising in step due to the younger demographic that is contracting the virus through poor social distancing, this will have an inevitable effect on economic activity just when the economy seemed to be recovering quickly.

ASR use Technology vs. Banking as the proxy for Growth and Value and it is not often that stock markets can undertake a prolonged rally without carrying the banking bedrock of the real economy with it. This is more noticeable in Europe where the banking sector is still the main conduit for corporate funding and the introduction of government support. The European economies seem to have opened more successfully than other developed economies, seeing consumer activity bounce back quickly and safely, suggesting that a more prolonged recovery may be possible in Europe at this time. We expect investment opportunities to present themselves in Europe and ASR argue that it is difficult to like European stock markets without supporting the banks. The set of fiscal policies including the latest EU Recovery Fund would have been unlikely pre-pandemic, but these developments will likely change the eurozone approach to stimulating demand and improve collective risk sharing between nations.

The Chinese economy has bounced back sharply with manufacturing and service sectors once more in expansion territory and the property market activity also strong. China has benefitted from the global demand for medical supplies and IT equipment but is likely to see economic activity sustained as the developed world begins to re-open. Over the last month Chinese stock markets have been strong emulating the optimism in the real economy, however, tensions with the US and UK remain leaving an underlying anxiety among investors.

The underperformance of the UK stock market due to the ongoing uncertainty of trade negotiations with Europe has been a theme this year but there is a fear in certain quarters of the Japanification of the UK economy. However, the convergence of nominal rates at the long end of the government yield curve under-estimates the ability of the UK economy to create inflation unlike Japan, so real rates are actually diverging approaching -3% in the UK. Furthermore, the UK is running a current account deficit of 3.3% of GDP, second only to Brazil, while Japan has a 3.6% surplus. This suggests that sterling, which has been held down by Brexit since 2016, is unlikely to strengthen in the near term when interest rates are anchored close to zero.

ASR research monitors growth in money supply as a signal of a potential rebound in economic growth and the surge in money supply over the last quarter has been held up by some as a sign that there will be a strong rebound in economic activity. However, this may also be the result of central bank accommodation of government fiscal policy and companies using credit lines to drawdown cash rather than proof of a strong recovery.

The rally in gold has not gone unnoticed with the price in US dollars now above $1800/oz approaching levels last seen in 2010 / 11. There is a possibility that this may provoke some profit-taking especially with discussions regarding future inflation back on the agenda but within a multi-asset portfolio precious metals still offer a hedge to equity volatility and any perceived weakening in the US dollar.

There is a possibility that the default rate is being underestimated by markets thanks to central bank intervention and that insolvency will become a problem during the second half of the year as that support falls away but lockdown scarring affects the return of economic activity. We remain cautious on low rated companies but believe there is value in the yield pick-up of medium duration, investment grade corporate bonds over government bonds.

 

plan it

By Tom Wickers, Hottinger Investment Management

The UK economy is open for business. Non-essential shops, restaurants and pubs have tentatively wiped down their counters and unlocked their doors as the British public reacquaints itself with liberties we all took for granted just six months ago. Last week, the UK officially started its travel corridors with over 70 countries and Oliver Dowden, the culture secretary, announced that leisure and entertainment will be making a comeback in the form of swimming pools, theatres, and music venues. Freedom tastes so sweet, or does it? The natural flipside of the coin which is plaguing the minds of analysts and households alike is the potential for a second wave of the virus. After coming so far, now would seem a fitting time to assess whether we have come far enough to recover from this pandemic.

Figure 1: Daily confirmed COVID-19 cases as of 13th July 2020. Source: ourworldindata.org[i].

So, can we avoid a second wave? The simple answer appears to be yes, as some Asian countries have managed to do so emphatically. However, there are a number of niggly caveats to this assertion that will likely mean some countries do have second waves. The ability to limit COVID-19 spread will be determined by the extent to which countries want to open their economies, the protocols in place and whether the public heeds safety advice. As such, it may be that some western countries have already opened up their economies too far without the proper advice in place. The United States is the elephant in the room, but UK government policy is another example. A requirement to wear protective masks when shopping has only just been announced by the UK government, yet for some time there has been evidence to suggest that it could be a crucial factor in determining whether economies experience a second wave[i]. COVID-19 could be airborne, according to studies, meaning that transmission can occur through breathing as well as the larger droplets from sneezing and coughing that are commonly associated with flu. The implication is that the virus transmission rate may not be controllable if indoor activities are permitted without suitable protection.

Additionally, super-spreader events have led to many of the outbreaks we have seen in eastern and western economies alike and have been estimated by some to cause up to 80% of secondary transmissions[iii]. A super-spreader choir practice held near Seattle in March was studied and it was found that 53% of the room became infected within 2.5 hours[iv]. Identification and prevention of these events will be crucial in limiting the number of outbreaks, meaning some aspects of life will not return to normal in most economies until a vaccine is found.

It is no secret that some countries have contained the virus more successfully than others. According to one of the most prominent Chinese COVID-19 scientific advisors, Zhang Wenhong, the outbreak “has already ended” for China[v]. A crucial explanatory factor for the disparity in the effectiveness of lockdowns is unsurprisingly held in the efficiency of the track and trace system run in that country. More specifically, test frequency has been found to be substantially more important than test sensitivity in tracking the virus and counteracting outbreaks[vi]. While there can be false negatives and positives from poor sensitivity, what matters most is being able to detect proportional increases in infection rates sooner rather than later. Any government that does not have an efficient or decisive system will struggle to contain waves and outbreaks, which helps explain why China and Germany were so adept in containing the virus.

One key debate that keeps circulating regarding the virus is whether opening up economies is worth the risk of further outbreaks and a second wave. Some countries, such as Iran, have already announced they will not be able to shut down again. From a medical standpoint, the death rate from the virus would be weighed against the number of deaths caused by poverty or neglect. The number of deaths caused by lockdowns is likely to be the subject of many future studies. However, only the death rate attributed to the virus can currently be fully examined and estimated. At the start of the global crisis in March, the COVID-19 death rate estimates ranged from 0.1%, comparable to that of flu, to 2%. Scientific studies have since narrowed that uncertainty somewhat to a range of figures between 0.5 – 1.0%[vii]. The current discrepancies are partially due to uncertainty over true infection rates, stemming from two large information barriers that we are all aware of; that most governments cannot conduct as many tests as required to fully track the virus and that the virus figures have become political, with some countries not publishing representative figures. Irrespective, the fear of overloading hospitals has lessened, and many healthcare systems are confident that they have capacity for a second wave[viii]. Furthermore, drugs such as Remdesivir will aid in reducing the death toll. A second wave of COVID-19 will, however, exact a sickening toll on populations if the virus is allowed to spread unchecked. As an illustration, Imperial College London have estimated that the lockdown in Europe saved around 3.1 million lives[ix].

To determine whether an open economy is worth the risk from an economic perspective, we can evaluate whether it has been worthwhile for those countries that retained more permissive restrictions in the first wave of global infections.

Figure 2: The relationship between changes in a country’s number of new cases per month and the changes in a country’s PMI figures for that month. The relationship is assessed for countries with a low stringency index compared to the proportion of their tests that are positive[x]. A line of best fit is shown for both scatter graphs[xi]. The number of cases is on a logarithmic scale to account for the exponential nature of a virus spread.

Figure 2 assesses the economic performance of countries that have been the most lenient with virus-related restrictions considering their respective infection rates[xii]. Most of the countries are those you would expect from recent headlines, including Sweden, Brazil and the United States. The figure illustrates a strong negative relationship between COVID-19 figures and economic figures, particularly in services, which suggests that not locking down does not save an economy. The public has tended to take matters into its own hands by reducing its activity and exposure without the need for enforcement, as exemplified by the response in Sweden[xiii]. Sweden’s economy slowed just as much as its European counterparts that went into lockdown and yet its neighbouring countries have made much more progress in reducing infection rates. Hence, unless there is a change in behaviour towards increasing virus levels, a surge in virus levels should almost be avoided at all costs – especially for developed economies that are highly concentrated in the services sector.

While countries are enjoying their new liberties, they should err on the side of caution at all times. Rapid tracking, tracing, and countering has proved very effective, but many countries are yet to be able to instigate such a diligent system and much uncertainty remains in best-practice to safeguard against the virus. However, it will be difficult to justify risks taken if they lead to a second wave of infections, which would cause severe damage, when a second wave does not appear to be an inevitability.

[i] https://ourworldindata.org/covid-cases

[ii] https://www.nature.com/articles/d41586-020-02058-1

[iii] https://wellcomeopenresearch.org/articles/5-67

[iv] https://www.cdc.gov/mmwr/volumes/69/wr/mm6919e6.htm

[v] https://www.globaltimes.cn/content/1194123.shtml

[vi] https://www.medrxiv.org/content/10.1101/2020.06.22.20136309v2

[vii] https://www.nature.com/articles/d41586-020-01738-2

[viii] https://www.theguardian.com/world/2020/jun/22/why-doctors-say-uk-better-prepared-for-second-wave-coronavirus

[ix] https://www.bbc.co.uk/news/health-52968523

[x] https://ourworldindata.org/coronavirus/country/united-states?country=~USA

Conducted on a subset of countries where the ratio is low for Stringency index (the maximum employed this year) versus total cases (logarithmic)/no. of tests. This effectively determines countries that have not employed strict measures in line with the danger to their citizens compared to the rest of the world. The model is simple so subject to flaws but as an approximation has been deemed appropriate.

[xi] The manufacturing line of best fit ignores two outliers, the services line of best fit ignores on outlier.

[xii] The countries that exhibit this characteristic and also have PMI figures are Sweden, Brazil, Mexico, Qatar, Nigeria, Indonesia, Colombia, South Africa and the United States. Only Sweden, Brazil, Nigeria and the United States have Services PMI numbers.

[xiii] https://www.marketwatch.com/story/sweden-didnt-impose-a-lockdown-its-economy-is-just-as-bad-as-its-neighbors-who-did-2020-06-25