CFM Quarter 3 2020 Newsletter

UK Economics

 

Some UK economic indicators are quite strong, indicating that the economy is growing and rebounding from the March/April lows.

Construction in September grew much faster than expected *IHSMarkit/CIPs. Overall new orders grew by the strongest level since before the first lockdown. Confidence was also the strongest since February.

 

Services also grew in September (following the largest pace of growth ever in August) and manufacturing grew for its 4th successive month in September.

 

These statistics tend to indicate the underlying economy is stronger than many media headlines suggest. Partly they are simply due to rebounding from March/April’s very low levels but it is encouraging the recovery is occurring quickly and is sustained.

 

View: UK stocks are currently very low relative to a number of overseas competitors. If the UK economy continues to grow and a Brexit trade deal is sealed. UK stocks could perform strongly in 2021.

 

US Economics

 

The US economy is driven by the consumer. The most watched gauge is the University of Michigan’s consumer sentiment survey which takes place monthly. In September the reading was 80.4. This is the highest reading since March.

Another closely watched gauge of US economic activity is new house building. This measure was very strong in June, July & August but the pace of growth fell back slightly in September.

 

During the quarter the US Federal reserve changed its policy on inflation. In future it will allow inflation to fluctuate over its target (2%) if inflation has been below target for a period of time. This policy could have significant implications for bond and stock prices. If inflation increases this means companies are being able to increase their prices and usually therefore that their profits are increasing. Such conditions would be good for stock prices.

It is possible the Bank of England will over time, move to a similar policy.

 

VIEW: Uncertainty over the outcome of the US election in November may slow US growth. After the election either candidate might impose regulation on US tech companies and or impose taxes on them. For much of 2020 technology share prices have risen significantly. Regulation and taxes could reduce that growth.

 

Japan

The services sector in Japan continued to shrink in September. Although at its slowest rate for eight months. Japan’s economy is led by exporters and with COVID shut downs they have been particularly hit.

 

VIEW: Japan’s economy has some structural issues. An ageing population, high debt to GDP and is still skirting with dis-inflation. Their stock market does not traditionally have many dividend paying shares and their stock market has been very volatile in the past. That being said, quantitative easing has of late led to their stock market rising as the government effectively buys stocks in the open market.

 

Europe

 

Eurozone construction activity fell for the 7th consecutive month in September and at the fastest rate since May, led by falls in activity in both Germany & France. Home building, infrastructure work & commercial projects all contracted amid increases in coronavirus cases & stricter regulations.

 

Construction in Germany fell in September. It was the lowest reading for 3 months.

 

VIEW: Quantitative easing has supported European economies as it has elsewhere around the world. As its effect wain, the underlying structural issues between less well off southern European states versus their wealthier northern counterparts will remain and keep coming to the fore. Many European banks are bankrupt. Germany will likely find itself under more and more pressure to support these nations.

 

China

It is very hard to know exactly what is happening with the real Chinese economy as the statistics are not terribly reliable.  The best way to get exposure to Chinese growth is through listed funds.

 

View: US/China relations will take centre stage after the US election. Either candidate is likely to have to take a firm line with China.

 

Financial Markets

 

Stock markets have generally held firm though the last quarter. The best performers were again technology shares, partly a case of structural changes that we all know, home working, faster adoption of new technology but also through weight of money. Traditional companies and value stocks look particularly cheap when judged against tech.

 

Changes to the US Federal reserves policy on inflation may have significant future effects that have yet to be seen in markets. The Fed will now allow inflation to be above trend for some time. The effects of this are unknown but if prices are going up, in the short term so will company’s profits. Usually at some point, higher inflation means higher interest rates and lower bond prices. For the last 25 years bonds have only gone one way. Up. Interest rates only down. Even if interest rates are not put up, inflation will erode the real purchasing power of money. Stocks are the best way to hedge against this.

 

VIEW: Many UK stocks look under valued when viewed against conventional methods and also against overseas peers.

 

If a reasonable trade deal is reached with Europe and the UK economy continues to grow, they could perform well in 2021.

 

Should the UK government follow the US lead and let some inflation into the system, this may well be good for stocks in the short to medium term.

 

US tech stocks look expensive. Policies implemented after the election are likely to dictate how much longer this can go on for.

 

A vaccine for COVID could see significant upside to share prices in the UK.

 

Keep well and i look forward to speaking to you soon. Paul Coffin

Further Reading