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This article first appeared in the Telegraph
Three months ago, my wife and I were enjoying a week driving round the Alentejo region of Portugal, eating in busy little restaurants and averting our gaze from what looked like a nasty situation developing in northern Italy. So much of that week seems to belong to another world. Not least, what investors were thinking about before everything else was eclipsed by our single-minded focus on Covid-19 and its implications for the economy and markets.
Six stories, in particular, mattered a great deal In February before slipping off the radar in the weeks since then. But they haven’t gone away and all of them came back last week to remind us that there’s more to the market outlook than the pandemic.
At the beginning of the year, trade tensions were top of the agenda for investors, with hopes for a partial resolution of the Sino-US stand-off driving the market to a new all-time high. With the US Presidential election only six months away, there was always a danger that America would start to flex its muscles towards China again as soon as the corona-crisis began to ease.
There is not much that the Republicans and Democrats agree on, but there is clear bi-partisan support for pushing back on China and the provenance of Covid-19 has provided an open-door for both parties to push on. If anything, the anti-China rhetoric has broadened beyond trade in goods to include financial flows ($6bn of federal retirement funds won’t now be invested in Chinese stocks), a capital war (China may be disinclined to finance America’s $1trn deficit) and export restrictions (sorry Huawei).
Back in February, another story that was front of mind was Britain’s newly-secured exit from the EU. All that remained was the small matter of agreeing a trade deal by the end of 2020. Well, when was the last time you uttered the word Brexit? If ever there was a story we were happy to push off the front pages, this was it. But it’s back and it doesn’t look any prettier than it did.
It is hard to imagine a worse outcome than a no-deal Brexit at the end of the year. But, with no-one really watching the stalled negotiations, and all the old hurdles to a decent deal still firmly in place, that looks increasingly where we are headed. It was a bad idea three months ago. It is a worse one today as the free-trade world in which Global Britain was expected to thrive retreats into national and regional bunkers and we navigate the deepest recession since the 1930s.
If the Government is using the cover of Covid to push through its chosen Brexit, it is not alone in seeing a useful opportunity. Beijing understands the value of a distraction, too, and it is using Hong Kong as a way of diverting attention from its handling of the corona-crisis and its abandonment of a GDP growth target. Last year, markets were transfixed by violence on the streets of Asia’s premier financial hub. On Friday, they started to worry again as the National People’s Congress laid out plans to ‘improve’ national security in the former colony. The 5.6% fall in the Hang Seng index was the worst daily decline in five years as investors fretted about the city’s status in the region and its future trading relationship with the US.
The fourth story that would have dominated the financial pages in recent weeks had it not been overshadowed by the pandemic is the collapse in the oil price. The two stories are inseparable, of course, because a key driver of the plunge in the cost of crude, to zero and beyond for one brief and unprecedented moment, is the temporary shut-down of the global economy. The flip-side of those beautiful clear blue skies and empty roads has been a market awash in surplus oil.
The oil story is also inextricably linked to a fifth theme that seemed much more pressing in February than maybe it does now, but which has categorically not gone away - climate change. The outlook for oil companies may have improved marginally in the near-term as the price of both Brent and WTI rises above $30 a barrel. But, as BP’s boss Bernard Loomey recently said, we may have already passed the moment of peak oil demand. It was interesting, early in the market’s corona-correction that the relative performance of stocks rated highly on environmental, social and governance factors was noticeably stronger than those that scored poorly on these measures.
The final story pre-dated the health crisis in other parts of the world, notably in the rest of Europe, but it is thanks to Covid-19 that it has now become a hot topic for investors here. We thought negative interest rates was something they did in terminally stagnant economies like the Eurozone and Japan, but last week new Bank of England governor Andrew Bailey admitted that they could be on the way in Britain too.
With the base rate at a 300-year low of 0.1%, and the economy on the brink of an unprecedented recession, charging investors to deposit their cash in the bank no longer seems so fanciful, even if there’s little conviction that it is really a good idea.
When people ask whether there is a disconnect between the stock market’s rally from March’s low point and the economic reality, they are thinking almost exclusively about the impact on growth, jobs and profits of the lockdown. While they are right to focus on this mismatch, the past week has shown that there is a pretty long queue of other challenges vying for investors’ attention. Markets struggle to focus on more than one big story at a time, but we’ll need to if we want to understand where they go from here.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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