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Last Week in the City: Economic scarring a priority

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (18 to 22 May 2020).

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Garry white employee

by
Garry White

22.05.2020

Worries over the widening US-China dispute stopped this week’s equity rally on Friday after it announced a crackdown in Hong Kong that is likely to result in Washington China hawks seeking more action against Beijing.

Governments are looking at the longer-term impact of lockdowns on their economies. Expect to hear more around the world about ‘scarring’ over the next few weeks. John Redwood looks at the issue here.

The FTSE 100 was up 2.2% over the course of the week by mid-session on Friday, with the FTSE 250 rising 3.4%.

Covid-19 update from our Chief Executive Paul Abberley

While markets continue to have their ups and downs, they have moved broadly sideways of late, pulled around by three influences. First, there is a nagging unease that the partial recovery in stock markets since March doesn’t take into account the true damage to the real economy. But there are occasional glimpses of hope that a vaccine might be discovered and deployed in record time. Finally, there is some reassurance from the continued buying of securities by central banks, an intervention believed inconceivable before the financial crisis in 2007.

Against this backdrop, our investment managers are also taking into account the higher volatility of markets, which impact current portfolio risk, but without losing sight of the long-term time horizon appropriate for most of our clients. They are also considering options to mitigate the impact of dividend cuts on portfolio income. We are in new territory, but that is the nature of investing. No period is like its predecessor. It’s just that the differences are more dramatic right now.

My personal contribution is to strive to ensure that all our staff have the best environment we can provide to protect their own safety whilst maximising their ability to serve our clients.

Charles Stanley Radio

To support our remote living and working lives, we have launched Charles Stanley Radio to bring you the latest news from Charles Stanley.

Listen to expert commentary from our research team and analysts, informal Q&As with our colleagues to hear about their experiences adapting to this new way of working and specialist content from our partners. The two latest episodes are:

Spotlight Session: Vulnerability, rituals and learning to live in uncertain times. The psychological and emotional impact of coronavirus (part two). Listen here.

Spotlight Session: Bond market resilience – In this episode we hold a (relatively) jargon-free discussion about the significance of the bond market, it’s liquidity and the current trading environment. Listen here.

The radio page with all previous recordings can be found here.

What does ‘defeating’ the virus look like?

Monday’s strong rally was based on rumours that maybe an effective vaccine would soon appear to release the world from virus restrictions. Is this overly optimistic? John Redwood takes a look here.

 

Financial planning for millennials

Millennials may have been banking on a chance to capitalise on a drop in UK house prices when the world eventually recovers from Covid-19. They may be disappointed now. Sam Cowan takes a look here

Economics

After April’s unprecedented economic slump, as lockdown measures brought the UK economy to an effective standstill, the latest monthly health check for growth and jobs from IHS Markit and the Chartered Institute of Procurement and Supply (Cips) suggested the economy has recovered slightly this month. Its flash composite purchasing managers’ index (PMI) – which provides a snapshot of business activity using company surveys – rose to 28.9 this month from a record low of 13.8 in April. However, that is still far below the 50.0 mark that separates economic growth from contraction. The reading was also worse than the lowest point of the 2008 financial crisis.

The UK government borrowed £62.1bn in April, the highest monthly figure on record. The cost of Covid-19 furlough schemes had the largest impact, hitting £14bn in April. The government's independent forecaster, the Office for Budget Responsibility, said the gap between the UK's borrowing and spending could hit £298bn this year.

British retail sales fell by a record 18.1% in April as many stores were closed amid the coronavirus outbreak. The drop in April worsened from a fall of 5.2% in March when the government first introduced lockdown measures. Clothing sales plummeted by 50.2%.

China will not set an economic growth target for this year as it deals with the fallout from the Covid-19 pandemic. This is the first time Beijing has not had a gross domestic product (GDP) target since 1990 when records began. The announcement was made by Premier Li Keqiang at the start of the country's annual parliament meeting after the country’s GDP shrank by 6.8% in the first quarter year-on-year.

Another 2.4 million Americans filed for unemployment benefits last week, even as some states across the US eased lockdown restrictions. This means that almost 39 million Americans have lost their jobs in just nine weeks, a rate unseen since the depression-era 1930s.

Geopolitics

China’s authoritarian leaders have made a controversial move to restrict freedoms in Hong Kong. Its ruling Communist Party has set in motion a controversial national security law for the former British colony, a move seen as a major blow to the city's freedoms. The law to ban "treason, secession, sedition and subversion" could bypass Hong Kong's elected representatives. It may trigger fresh protests and demands for democratic reform.

Garry White’s second article on the new space race, prompted by geopolitical rivalry between the US and China, looks at the race to install 5G ‘mega-constellations’ here. The first, about US actions to turning mining the Moon into a California-style gold rush, can be read here.

Brazil is now the country with the third-highest number of confirmed coronavirus infections in the world, after registering a total of more than 250,000 cases and 20,000 deaths. Only the US and Russia have recorded more infections. The country's far-right president, Jair Bolsonaro, has dismissed the risks and compared Covid-19 to "a little flu" and health experts have said that a lack of testing means that the real infection rate could be 15 times higher than official figures.  Indeed, ‘populism’ has suffered a big set of defeats at the hands of Covid-19 as it showed its weaknesses. John Redwood asks whether the ‘establishment’ is now back in charge here.

Investing styles

Active vs passive investing: John redwood argues there is no such thing as a purely passive or active investor. The more prosaic reality is most investors are partly active and partly passive. Read his argument here.

Energy

Oil prices rallied sharply earlier in the week, before falling on Friday after China scrapped its growth target and announced a crackdown in Hong Kong. Brent crude prices rose by about 5.8% over the week by mid-session on Friday to trade at around $34.40 a barrel by mid-session on Friday.

Transport

Short-haul carrier easyJet said it will resume some flights on 15 June, with all passengers and cabin crew told to wear face masks to protect against Covid-19. The airline said it would fly a "small number" of routes, with the initial schedule will include domestic routes across the UK and France.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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