| 14 August 2020 |
I hope I find you safe and well, and that since my last communication you have been enjoying your ‘summer holidays’!
Although, I’m not sure that a very wet July did much to promote future staycations when normality resumes…..
An investment area that will be gaining further traction in the future are funds that are aligned to Environmental Impact, Sustainability and Corporate Governance processes (ESG).
These types of investment are now firmly in the sights of global economies and political requirements and are here to stay.
You may have heard, or seen reference to this elsewhere but have been unsure what it all means. Therefore, we have created an information sheet explaining ESG for reference which is attached.
I have detailed below some market updates and views from some of our Investment partners which I hope you find to be of interest, as well as details of an exciting new development at Roxburgh Group.
Market Updates and Views
Global equity markets largely pushed higher this week on positive economic data. The Nasdaq hit a new record high, as did the gold price, while the S&P500 is now less than 1% below its February peak of 3386.
Global purchasing managers’ indices, which are used as a way of measuring how businesses are performing, showed improvements in most regions suggesting we are on the road to recovery.
China is outperforming the rest of the world as its economic recovery continues.
In the US exactly two thirds of companies have reported better-than-expected sales levels and last week saw updates from some of the big tech names. After announcing stellar results as beneficiaries of the new work and play at home environment, the combined market value of Facebook, Amazon, Apple and Google soared by $230bn in after-hours trading, taking their total value to more than £5trn for the first time.
Equities in the UK and Europe have fallen on poor economic data, rising coronavirus cases and a “wall of worry” about the economic outlook later this year.
The UK continues to underperform other global markets, largely driven by its over reliance in certain key sectors.
For example, the Banking Sector is facing some unique challenges. The Covid response saw a predictable cut in interest rates and increase in QE, but it also saw new policies which attempted to send relief to where it is most needed. For example, the UK government introduced the Coronavirus Business Interruption Loan Scheme (CBILS) in which 80% of each loan was guaranteed by the government. The remaining 20% however was still a significant risk to banks which were already facing the probability of credit losses on their existing lending. But when banks attempted to seek personal guarantees for their share of the risk there was a backlash from borrowers and accusations of profiteering.
The Bounce Back Loan Scheme (BBLS) has avoided the thorny issue of risk sharing but the government continues to use the banking system as an instrument for the delivery of centrally manufactured policy tools, rather than allow them to be the efficient allocators of entrepreneurial capital that they are supposed to be. If retail banks are now the lenders of last resort, even if only from an administrative perspective, then that adds an additional burden at a time when credit risks begin crystallising and interest margins are coming under more pressure. The prohibition on dividends, even those already declared, further blurs the line between the state and banks.
New virus cases appear to be slowing in the US, suggesting the pausing of re-openings and the mandated use of masks in many states may be working. It also saw a reduction in hospitalisations, and the fatality rate is now around 1.5% compared to 7% in April. This is probably because more young people are getting the virus while older people are taking more care to protect themselves, while treatments are also improving. All this helps reduce the chance of another national lockdown. Unfortunately, after a period of falling cases, Europe is now seeing infection rates rise again, driven heavily, but not exclusively, by Spain (about 50%). Japan has also seen a big rise and even China has seen a pick-up in new cases, albeit from a very low base. It demonstrates just how hard the virus is to completely suppress, but China is an example of how an economy can recover while managing localised outbreaks.
The news of two revolutionary new coronavirus testing kits that give results in 90 minutes will no doubt be a great help in containment efforts. Previous tests took two days.
All that glitters… The best play on a weaker dollar has been precious metals, and while the focus has centred on the gold price hitting record highs, silver has actually been the better performer of late, rising nearly 25% in July alone.
The 'workshop of the world', for a world out of work
As we look forward to returning to the comforts of our lives before lockdown, investors continue to speculate on the pattern of the world's economic recovery. From an optimistic "V" shape, to a prolonged "U" or a "W" indicating a second dip in equity prices, similar to recessions of the 1970's and 80s. Perhaps more clear is that stark differences will emerge between the recovery rates of Europe, Asia and the United States. While predicting the pace of the global recovery will remain challenging for world leaders due to a persisting degree of uncertainty relating to coronavirus, we are able to look at individual factors affecting economies around the globe to assess where the most encouraging investments lie.
Unsurprisingly, countries issuing the lowest levels of new government debt during the crisis are more likely to be among the first to recover. In particular, the Asia Pacific region was largely able to act efficiently in suppressing the virus, and thereby control their levels of debt, which will result in a notable advantage when conditions return to a level of normality. On the contrary, in the United States, business debt surged during the first quarter in order to grapple the mounting effects of the coronavirus, and it will continue to rise where outbreaks persist. While effectively bolstering the economy, long-term recovery may be slowed when the additional debt anchors future investment. While regions recover at differing rates, there will undoubtedly be an interesting knock-on effect for global supply chains as nations rethink their linear supply chains.
Whilst not out of the woods completely, many countries in Asia are recovering from the pandemic sooner than those elsewhere.
Looking at the chart below, we can see China's return to growth over the first quarter. The driving factor remains momentum from state-driven industry, weighed down by the lag in exports where global supply chains have been disrupted.
China's recovery
A Different Perspective……
A recent Aberdeen Standard Investments Research Institute presentation followed a slightly different format in so far as it was a discussion around some of the longer term impacts the COVID-19 crisis across a number of key themes of Health and Well-being, State Capacity, Populism, Globalisation looking at the relative winners and losers. The main points of the discussion are summarised below:
Paradigm shifts - in the long term outlook due to COVID-19 crisis it is likely there will be long term winners and losers at a country and sector level , there are a variety of ways the crisis will impact over the longer term across both the economy and the environment, the impact goes beyond any single silver bullet solution.
Populism - we know some countries were more exposed to populism than others pre crisis we know the way populism plays out in different countries can vary quite a lot. Social inequality, income inequality are generally associated with higher levels of populism. We are able to isolate these factors at a country level. Take the US as an example, President Trump has seriously struggled dealing with the crisis, does that mean there will never be another populist far right or far left leader in the US? Absolutely not, we require more nuanced thinking than drawing big conclusion.
Crisis management - how is a country set up and able to cope with the crisis and as importantly how does it plan and engage for the future? So which countries stand out in their handling of the crisis not just how it handled the initial storm but also how it will live with the effects of the longer term aspects of the crisis and demonstrated their capacity to manage this well.
Health and Wellness – countries ability to quickly implement effective test/track/trace procedures. Ability to re-organise medical systems and to quickly redeploy staff and resources from one area to another, countries like South Korea and Japan (who have precious experience of MERS and SARS) were better able to adapt quickly. Part of this is the organisation of the healthcare system however, there is also a strong government focus to really interact with the healthcare systems along with putting in an effective track and trace mechanisms. Additionally, there is a greater acceptance by the population of the government tracking your heath, movement and mobile phone data. More libertarian countries can struggle with this aspect of dealing with a pandemic. i.e. ideological challenges to health management can be difficult for some countries. Looking at tracking technology digital system uptake in some countries is substantially based on political culture, trust in the government and how individual information will be used will have a significant impact. In countries with more coercive powers like China the state can incur on personal liberties than developed Western economies giving them an advantage in controlling future outbreaks. East Asia does have significantly more experience in dealing with this type of crisis over the last 20 years.
Europe – Substantially different rates of mortality and infection per million of population across the continent are more difficult to explain, for example why has the Italian experience been so different to the German experience? The crisis hit Italy first and very hard, the Italian political system is very bureaucratic, unstable and perhaps not as well set up as Germany to deal with the crisis. The UK has some of the most pervasive powers of any western democracy in part due to terrorist threats but the ability to track and trace has been extremely limited, reflecting a lack of political willingness to adopt effective technology partnerships. Germany has an almost unique relationship between government and business, this quick willingness of the German government to work with corporates which existed pre crisis increased Germany’s capacity and capability implement effective measures quickly.
Long term v short term – Looking at the short-term handling of the crisis the UK and US don’t look particularly great in terms of infection and mortality rates, and the overall crisis management of other countries. However, looking at some of the longer-term aspects such as medical capacity and vaccine\cure development the UK and US look much better. State capability aggregated across all aspects of the crisis is different from state capability to act on any single aspects of the crisis. Elitism at an institutional level can be valuable, in the UK the Oxford research into a vaccine is very effective due to the high concentration of cultural intellectual capacity, high funding levels and the ability to gather this capital and focus on a single point of research, some of the long term benefits of elitism can also lead a country to struggle with populism. So, the very countries that have looked worst in their short-term handling of the crisis are the same ones that are leading the way in developing long term solutions. There is a similar story being played out in the US through Operation Warpseed where the sweeping aside of normal barriers is allowing faster development of a vaccine which of course does come with additional risk.
Globalisation – The global pandemic is a setback for globalisation, many countries and regions are looking to shorten their supply chains, cross border trade in goods and services have been negatively affected as has international tourism and travel along cross border capital restrictions. Ironically the two countries doing most to undermine global trade the US mainly for political reasons and China where they abide by the letter if not the spirit of international trading laws are likely to benefit most due to their dependence on very large domestic economies. It will be the smaller countries that will need to adapt more to a regional basis going forward. In Europe we are seeing an attempt to re-shore the supply chain, however this being done in a more subtle way through relaxation of the EU complex rules and regulations in areas such as state aid.
An exciting new development…...
Roxburgh Group have created a partnership with Mossy Earth, as we both share a passion for nature, the outdoors, and the preservation of our natural world.
Mossy Earth restores wilderness through rewilding and reforestation projects across a variety of ecosystems around the globe.
The main aim of these projects is to restore ecosystems, promote biodiversity and mitigate the impacts of climate change.
Mossy Earth only plant native species that will help boost local biodiversity and enhance the level of rewilding. Through their on ground partners, they carefully manage the planting area and replant any trees that die in the first 5 years.
Roxburgh Group are committed to purchase a tree for every client who invests in any Environmental Impact, Sustainability and Corporate Governance (ESG) approved investment fund.
All investors will receive an individual photo of their tree along with its GPS coordinates.
If you would like any further information about incorporating ESG into your existing portfolio or would like to invest additional monies, please do not hesitate to contact us.
I hope you have a great weekend and remember to keep safe!