1 Sept 2020
Over the past eight months, £15 trillion of funds has been pumped into the market by governments and central banks across the globe to stimulate the economy and have shown some effectiveness. In August, high-frequency data including shipping activities, online job adverts and navigation apps usage statistics have all shown that the economy is recovering gradually, though at a slower pace than previous month and is still away from pre-pandemic level, enough to boost investor confidence in equity markets. In August, MSCI Emerging Markets Index increased 2.2%, while MSCI Developed Markets Index increased 6.7%. Nasdaq Index lead the increase and was up by 9.7%. Healthcare and information technology companies were the top risers.
The bond market, on the other hand, has shown more stability. Bloomberg Barclays Global Aggregate Corporate Bond Index was flat last month. Investors should be aware that some companies will take advantage of the current low interest rate by calling back existing bonds and issuing longer-dated, lower-interest bonds to reduce their financing costs. Aviva Insurance Group has already called back one of its perpetual bond in early August, and we expect this trend to continue.
Sovereign bonds prices declined slightly during the month, with yields edging up but remaining at historical low due to investor's demand for safe heaven. Taking the UK as an example, over the past five months, gilt issuance has climbed to double the annual budget. The gilt market has managed to absorb the extra issuance with the help of Bank of England's quantitative easing policy and market credibility built up over the years.
Government bonds yield as of 1 September:
UK Gilt 10 Year @0.21%
US Treasury 10 Year @0.69%
German Bund 10 Year @-0.49%
According to traffic camera images analysis, the number of vehicles and pedestrians has returned to pre-lockdown level in parts of the country, including London and the North East. The Office for National Statistics released its GDP report for the second quarter, GDP was down 20.4% compared to previous year, but increased in both May and June, with monthly increases of 2.4% and 8.7% respectively.
The UK government's decision to end the furlough scheme in October has not changed, despite the fact that France and Germany have both announced extension to their furlough schemes. More than 9 million UK employees have been benefited from the scheme, but the claimant count last month still reached 2.7 million, a level not seen since the 1980s. It is widely predicted that this number will rise sharply again by the end of October. The future of hospitality industry, including hotels, restaurants and bars, is still a mist.
During the first half of the year, the market was expecting a V-shaped or U-shaped recovery, but we tend to believe that a K-shaped recovery is more likely to occur as pointed out by many economists. First of all, the performance of FTSE100 Index over the past few years was not satisfying. Last week, US tech titan Apple overtook the entire market capitalisation of the FTSE100 companies. The majority of FTSE100 companies come from traditional industries such as banking, energy, material and real estates. The rising stars, technology companies, account for only 1% of the FTSE100. Traditional businesses have shown negative overall shareholder returns for many years. Their business expansions are based on debt, so the cash flow generated is used primarily to pay down debt, rather than creating value. We doubt they could really be part of the future stock market recovery. Secondly, though there are not as many UK companies representing the 'new economy' comparing to the US, many UK companies do have 'new mindset'. Companies from industries such as logistics and warehousing, green packaging, cleaning, disinfection and healthcare may not have the fame of Amazon or Google, but they continue to create value for shareholders by identifying long-term trends. Therefore, taking advantage of the future K-shaped industry differentiation will be the key to investing in the UK.
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