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Last Week in the City: Optimists see quick recovery

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (27 April to 1 May 2020).

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (26 April to 1 May 2020).
Garry white employee

by
Garry White

in Features

01.05.2020

Equity markets edged higher this week, as investors continued to hope the impact of the Covid-19 crisis would be temporary - and a “V-shaped recovery” would emerge. However, the first reading of US GDP data for the first quarter of 2020 showed the economy shrank at a 4.8% annualised rate – much worse than expected. The Eurozone economy shrank by 3.8% on the same metric.

The FTSE 100 was up 0.5% over the course of the week by mid-session on Friday and the FTSE 250 was up 3%.

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GDP

The lockdown could result in UK GDP contracting by between 5% and 10% in 2020, according to accountancy group PwC. No UK GDP data has been released yet, but growth was weakening even before the virus outbreak emerged. The US economy shrank by an annualised rate of 4.8% in the first quarter of the year, which covered the first six weeks of the crisis. This was worse than expected. The Eurozone economy contracted by 3.8% in the first quarter, the sharpest rate on record.

Dividends

As the Covid-19 pandemic causes extensive disruption to economies and businesses, listed companies have been shelving their dividend payments to conserve cash. Dividend suspensions have been seen across a whole range of sectors, but the notable change this week came from Royal Dutch Shell.  The oil major reduced its quarterly payment for the first time since World War Two following the collapse in global oil demand due to the Covid-19 pandemic.

This means that the fall in income levels over the next 12 months will potentially be far greater than was the case during the Global Financial Crisis. So, Adam Carruthers, an analyst in our Collectives Department, looks at using funds as part of your dividends strategy and looks at the types of investments on offer here.

Covid-19 trends

Numerous trends that were in place before the Covid-19 crisis have now been accelerated. These include the migration of shopping and services online, resulting in a crisis on the traditional high street. Amazon has been a major beneficiary and its first-quarter results showed that sales in the quarter rose 26% year-on-year to $75.5 billion as consumers on lockdown turned to the group for deliveries of essentials. However, earnings were lighter than expected as costs to adapt to changing consumer demands and workforce needs as the coronavirus pandemic escalated. In contrast, Andrew Goodacre, chief executive of the British Independent Retailers Association, told MP’s sitting on Parliament’s Business, Energy and Industrial Strategy Select Committee that it had been the “worst time ever for retail” after the pandemic hit the UK. He said 20% of retailers surveyed by the trade body claimed they do not intend to reopen after the lockdown.

Investment in green infrastructure is likely to increase as counties launch projects to try and create jobs. The European Union (EU) recently confirmed that it sees green growth as its prime objective. It will convert this into its chosen way out of the Covid-19 recession. Democrat Presidential candidate Joe Biden uses the same language as the EU, offering a big Green Deal. He like them wants to pledge to go to net zero carbon dioxide output by 2050, with tough intermediate targets for 2025 and beyond.

John Redwood argues that neither the digital nor the green revolutions are going away because of coronavirus here.

Lockdown has also increased demand for technology and online services, following an explosion in the number of people using the internet to work from home. But, as the year progresses, the specific areas of technology that are the real winners from this crisis are likely to emerge. Garry White argues that not all technology companies are the same here.

Another area that has seen its crisis become more challenging is the automotive industry. Carmakers faced a difficult transition to greener vehicles before the pandemic struck. It now faces an even bigger task. It needs cashflow and profit to finance the big demands of designing, building and equipping production lines for new electric models. It will have to contract existing capacity for diesel and petrol cars more quickly, writing off investment where necessary. A period of many weeks with little or no cashflow just makes that financing task more daunting. John Redwood looks at the challenges created by phasing out the internal combustion engine here.

Energy

There was more decorum in energy markets over the last week following the unprecedented fall of US oil futures into negative territory in the previous week. The oil price rallied after there was a lower-than-expected increase in US crude inventories reported by the American Petroleum Institute. Crude storage rose by 10.6 million barrels instead of the more than 13 million barrels expected, which was taken by some as a signal that the glut of oil is not as extreme as some believe. Brent crude prices rallied 26% over the week by mid-session on Friday to trade at just under $27 a barrel. 

Property

Before the Covid-19 crisis, property in the developed world had a lot to offer the investor. Income levels on good quality property in the main cities of the world were considerably higher than high-grade government bonds, with the added advantage that rents could grow as economies prospered. However, the virus situation means that work patterns are likely to change when the restrictions are eased. John Redwood looks at the implications for the property market here.

Travel

Airlines have been one of the hardest-hit industries in the lockdown and their crisis looks likely to continue for some time, as it will be one of the last areas where restrictions are lifted. British Airways, owned by IAG, said it would cut up to 12,000 jobs out of its total staff of 42,000 due to a decrease in air travel because of the pandemic. Management also explained that it will take several years for air travel to return to pre-virus levels – something which has been said by airlines across the world. Ryanair also announced 3,000 redundancies. It’s outspoken chief executive, Michael O’Leary, said the airline won't fly if middle seats are required to stay empty for what he called “idiotic” social-distancing rules. In the US, Boeing raised $25bn in the bond market, shunning a government bailout.

Retirement

Are your retirement plans changing because of the impact of Covid-19?

Many people are now considering whether it is affordable to bring forward their retirement plans or whether they might like to wind down earlier. Neil Torney, Charles Stanley’s Director of Financial Planning in Scotland, takes a look at the issues you need to be thinking about here.

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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