7 from 7
As the strangest summer in decades winds down, everyone is starting to think about what the last third of 2020 might have in store. We’ve provided answers to the seven most common questions we’re asked by our clients – and as ever, if we don’t know, we’ll say so.
US election: Who will win, and what will it mean for equities?
The next two months will be screamy. Right now, Joe Biden is still in the lead, but it’s slowly eroding. We think the US coronavirus case numbers will continue falling, which will benefit Donald Trump. The election is wide open – but Trump has the edge.
COVID-19 was a unique event, but government debt levels certainly aren’t – and nor is the way we deal with them.
A Trump victory would extend the market-friendly policies of the last few years. But Biden is no socialist, and if he won, he might curb some of the social and trade policy excesses of the Trump era. Regardless of who wins, we think the US economy will be strong, and US companies are likely to flourish. US equities will do just fine.
Certain economic sectors might be affected by the election. Trump would be good for fossil fuels and healthcare, Biden might be better for trade and infrastructure. But these outcomes are unlikely to be big and predictable enough for investors to want to try to make money from them.
Is there a bubble in US equities?
We don’t think so.
Apple, Amazon, Alphabet, Facebook and Microsoft have carried the rest of the US market so far this year. Alphabet (or Google) has increased its size by a quarter compared to 2019. Microsoft and Facebook are around 50% bigger. Apple and Amazon have nearly doubled in size.
If it weren’t for these five companies, the US index would be more than 10% lower than it is now. So the question is, are these companies worth it, or is it all hot air?
Looking at their last three years of results is enough to convince us that these businesses deserve to be massive. On average, these companies have grown their sales by over 20%. At the same time, their profits have grown by over 50%.
Not only are these tech titans selling more, they’re doing so more efficiently with every year that goes by! And their markets are global. While current valuations may be too high, or too low, there’s no doubt that these companies make real money. Bubbles are built on people paying high prices for nothing, and that’s not the case here. Don’t ask us about Tesla, though!
China vs the West: Where is the Cool War going?
The US has been the dominant global power for a century, and is not happy about China’s increasing political power and influence across the world. All the more so when China plays fast and loose with foreign technology, trade, islands and territory, and other issues.
The tensions will continue. China will continue flexing its economic and political muscles. The Cool War between China and the West will last for decades yet. The world economy is so integrated via trade, capital flows, foreign investment, technology and people moving around, though, that it’s in everybody’s interest to reach compromises.
And in some ways, China’s influence is at a maximum right now. Its growth is slowing and its population will begin falling in a few years. It will push hard but open conflict would not suit its economic plans. We think it’s unlikely that the Cool War will turn nasty. Trade and other barriers may rise a little, but won’t choke off growth and the spread of ideas and technology across the world.
How do governments even begin to pay back the debt built up in the last year?
With people’s livelihoods at stake since March, governments across the world wrote blank cheques to get them to comply with lockdown measures: furlough schemes for households, loan guarantees for businesses. The result is that government debt is higher than before: the Office for Budget Responsibility says that UK government debt will cross over 100% of national income this year.
But we’ve seen worse – UK debt was double this coming out of World War II and was brought down in the fifties and sixties. The popular narrative says governments seek to ‘inflate’ the debt away. But this isn’t quite right. It’s not higher inflation but rather low interest rates compared to inflation that matters. So continue to expect nothing from your savings account!
But what’s often forgotten is that the post-war economic recovery was the strongest in the 20th century. Pent-up demand, new technology adoptions and government rebuilding projects led to a huge productivity boom.
Analogies with war are everywhere: from referring to NHS staff on the ‘frontline’ or defeating the ‘common enemy’. But comparisons don’t stop there: there’s a huge savings pile ready to be spent, the crisis has accelerated trends towards adopting more technology (think how many people will continue working from home) and governments are readying green infrastructure projects for the future. COVID-19 was a unique event, but government debt levels certainly aren’t – and nor is the way we deal with them.
With the departure of Prime Minister Abe, what is the outlook for Japan?
On the surface it could be easy to conclude that Mr Abe didn’t achieve much. Japan’s debt is still the highest in the world, the country’s demographics continue to worsen and its relationship with China remains fraught. But there have been some huge achievements: Japan’s endemic deflation appears to be ending, the drive to hire more women has helped alleviate the demographic pressures… and Japanese companies are becoming more profitable.
On balance, investors will look back at Abe’s time positively. And the investor-friendly policies will be tough to reverse as Japanese companies have become more shareholder-friendly without people losing their jobs. What’s not to like?
But investors know that Mr Abe was just the cherry on top. Japanese companies will continue being global leaders in tech hardware and high quality consumer goods. As ever, the outlook for global demand will continue to matter more than which Prime Minister is in place.
Will the end of the furlough scheme trigger a recession in the UK?
No – because the recession is already here, it just hasn’t been fully felt in the labour market.
The furlough scheme merely delayed the economic pain of lockdown. It gave employers time to consider their business models and plan for the future, rather than immediately go out of business. With a bolt from the blue like COVID-19, that made sense.
What doesn’t make sense is keeping over 10% of the country on artificial life-support – if a job doesn’t exist, there’s no use pretending it does. So businesses are now being asked to make their own decisions again on whether they can still function. For some, that will mean closing completely, others will have redundancies, and others may ask workers to take a pay cut.
So the next year is likely to see a strange pattern in the data, where economic growth and unemployment both move higher at the same time. Good news at the national level may not translate to good news for individual firms and workers.
Is Brexit going to come back onto the agenda in the next few months?
Just like the movie sequel that no one wanted, Brexit is no longer box-office. We’re in for the third – and hopefully last – instalment of the Brexit deadline.
Well, it’s actually the fifth if you include the 2019 spin-offs - “May’s last chance in April” and the autumn’s “Boris hasn’t pre-heated the oven yet”… diehard fans know what we’re talking about.
The market’s attention has drifted, though, and so has pretty much everyone else’s. The media and some politicians will try to tell us that this time will be different but it never is. The character arcs – more like character circles! – are non-existent: remainers are still remainers, leavers are still leavers. The plot is unchanged: complicated trade deals should only be decided at the 11th hour. And the twist isn’t a twist if we all see it coming: ‘No Deal’ continues to be averted because we know it’s the only threat.
That twist felt credible when the characters looked like they would actually go through with it. But the last movie saw the UK sign up to a Withdrawal Agreement, allowing for a border in the Irish Sea. As we approach the December deadline expect much of the same: No Deal will be averted because it’s no longer a credible twist. Yawn.