The early May bank holiday always brings a sense of anticipation across the UK. Normally, we wait with keen anticipation – testing the barbecues, cooling the drinks, hoping for sun (but planning for rain).
This year is different. Now we’re eagerly waiting for the weekend to be over. On Sunday night, we find out what the next month of lockdown might look like. After six weeks of confinement, speculation is rife.
Will we see lockdown measures extended? Loosened? Will different areas be released at different times? What about public transport? What is the future of the furlough scheme? The answers to these questions, and many others, are important. They will affect the lives of millions of people for months and maybe years to come.
But… a word of caution. Don’t expect a great deal from Sunday’s announcement – your hopes are likely to be dashed. The plan will be fuzzy, and with an air of trial and error about it.
The UK is now entering the ‘Dance’ phase of responding to the coronavirus. As we’ve laid out before, this involves a responsive strategy from the government; allowing some slack in the regulations, but being prepared to tighten them should COVID-19 cases rise once more.
We will of course be paying close attention to the approach laid out by the UK government – and will update you on our key thoughts on Monday.
Thinking globally and carefully
In terms of portfolios, the UK is just one piece of the puzzle. Given our global exposure we are just as focussed on what’s going on around the world – which is taking part in the same Dance, albeit with different moves and different tempos in different countries.
Hopefully, things will go well, and we can learn from each other. However, success isn’t assured. Until a vaccine is discovered, we are still fighting a defensive battle against a formidable enemy.
With that in mind, we are cautious of the optimism we have seen in financial markets recently – particularly in equities. The economic impacts of coronavirus will be far-reaching, and many companies won’t have clarity on their future for some time.
Some examples are obvious – such as airlines and tourism. Share prices of firms in these industries have struggled, as you’d expect. But there may be less visible casualties from the second-order effects of the lockdown, and equity markets don’t seem to be pricing these in.
Here’s just one example. Much online advertising is bought by the travel industry – showing you the blue sea, white beaches and lofty mountains. Alphabet (or Google as you may know it) made about $100bn from search revenue last year. Nearly $11 billion of that was from travel companies. How much of that will be back this year? We are not holding our breaths.
Companies like Google can take a 10% hit to sales. But smaller ones can’t. These kind of uncertainties – the ripples that can turn into waves – are in play everywhere in the world, and could be around for a couple of years.
We’re happy with the purchases we’ve made over the past month or so. European dividends, high yield bonds and investment grade corporate bonds have all performed strongly, and we see no need to chase fast-moving markets in an uncertain world. Last week, we trimmed our equity exposure back to neutral while we wait to see what plays out in the data and the Dance over the next few weeks and months.
Regardless of the official announcement on Sunday, we’ll keep our attention on the wider world, and on our clients’ portfolios. Have a great bank holiday weekend, stay safe, and we’ll see you next week.
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