Investment market update: August 2020
Once again, Covid-19 and lockdown issues continued to influence the market. But signs of a recovery are beginning to emerge, however, risk remains, and investors should expect uncertainty over the coming months.
Chief economic adviser to Allianz, Mohamed El-Erian has warned the world’s largest economies are risking repeating the mistakes of the 2008 financial crisis.
He explained while the threat of a global depression was averted in 2008, economies failed to secure high, inclusive, and durable economic growth. El-Erian argued that key to the recovery was reopening economies healthily and responsibly while also tracking longer-term household insecurity and productivity problems.
The headline figure this month was the economy shrinking by 20.4% in the second quarter. It’s the worst slump on record and puts the UK behind many other countries. Yet there have been positive signs too:
UK factory output PMI was at a three-year high in July with a reading of 53.3
Similarly, the services PMI reading beat forecasts with a reading of 58.1, the strongest increase in five years.
Despite this, concerns over job security remain. The Bank of England warned UK unemployment will hit 2.5 million, double the current figure. This links with the bank stating the Covid slump will be less severe than initially thought but recovery will take longer. GDP is not expected to return to its pre-Covid size until the end of 2021. Some of the first announcing job losses this month were:
Pizza Express closing 15% of stores, with up to 1,100 jobs being lost
WH Smith shedding 1,500 jobs after stores were affected by lower passenger numbers
Marks & Spencer announced 7,000 jobs would go over the next three months
Theatre businesses have also been severely affected, with many unable to generate an income since lockdown restrictions were imposed. Entertainment union Bectu said around 5,000 theatre jobs have been lost, over half of which are in the UK.
Whether businesses can expect to benefit from increased activity in town and city centres remains to be seen. The Household Finance Index, from IHS Markit, shows household spending fell in August as take-home pay declined. People are increasingly worried about their financial prospects and the risk of losing their job.
While workers are slowly returning to offices, many big companies have backed long-term working from home, including Schroders and PWC, which could have a significant impact on the high street. The Chancellor’s Eat Out to Help Out has been successful in getting more people to visit their local restaurants. Over 8 million discounted meals were claimed during August.
Finally, Chancellor Rishi Sunak has stated public finances are under strain. The national debt hit £2 trillion for the first time in August, meaning it’s now 100.5% of GDP. With the Autumn Budget drawing nearer, changes to tax could affect investors.
The eurozone economy shrank by an unprecedented 12.1% between April and June. But eurozone output is rising at the fastest pace since April 2018. The PMI fared better than estimated at 51.8, once again fuelling hopes of a recovery in the coming months.
The jobs market isn’t positive though. There was a record fall in employment. The number of employed people decreased by 2.8% in the euro areas and 2.6% in the EU in the second quarter compared to the first quarter. It marked the sharpest decline since the series began in 1995.
The gloomy outlook has been compounded by tensions between the US and China over tariffs. The US government announced it would maintain 15% tariffs on Airbus and keep 25% tariffs on a range of European goods announced last October, including wine, single malt whisky, olive oil and cheese. However, new tariffs that were threatened have not been brought in.
The US paints a similar picture to that of the UK and Europe.
The US economy contracted by 9.5% in the second quarter as the impact of Covid-19 restrictions were felt by numerous sectors. However, the manufacturing PMI was better than expected at 54.2, signalling the beginnings of a recovery.
The jobs market is set to be a key issue in the upcoming presidential elections. While the number of Americans seeking jobless benefits fell early in the month, more than a million filled in fresh jobless claims in a clear sign that many US firms are still making cuts.
As well as ongoing tensions with Europe, the US-China trade war continues. Early in the month, trade talks were delayed again leading to concerns that an agreement won’t be reached. However, both sides have reaffirmed their commitment to reaching a deal.
President Donald Trump also took the unprecedented step to ban TikTok and WeChat with an executive order. US companies were given 45 days to stop all transactions with the firms, with TikTok threatening court action. The step has added fuel to the existing tensions between China and the US.
As the first country to ease lockdown rules, China has been seen as a litmus test for global economic prospects over the coming months. However, with retail sales falling 1.1% year-on-year, the latest figures dashed hopes of a V-shaped recovery for other countries.
Like many countries, Japan suffered a record slump in the second quarter. The economy shrank by 7.8%, which wipes out all growth achieved since 2011.
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Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.