COVID-19 – An update From Ermin Fosse

Market Review September 2020

Stock markets generally had a positive month in August, albeit performance remained polarised with US shares continuing to be a driving force. The relentless flow of money into the technology sector showed no signs of abating, in conditions that look increasingly akin to the ‘dot-com’ bubble of the late 1990s.

Market Review September 2020
Ermin Fosse

Ermin Fosse

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Dot-comedy

  • Globally Covid-19 cases continue to grow but China and Russia fast track vaccines.
  • Fed statements fuel further Dollar weakness.
  • US and China hold ‘constructive’ talks on review of progress on earlier ‘phase one’ trade deal. 
  • US presidential election race becoming too close to call.
  • US fiscal stimulus still to be agreed by politicians.
  • Latest round of Brexit talks stall.
  • UK saw highest level of house sales in a decade with pent up demand/lifestyle change/stamp duty exemption.
  • UK staycations drive increasing retail footfall while forced savings boost online shopping. 
  • Eurozone industrial production continues to recover.
  • Shinzo Abe steps down and Japan’s economy contracts at fastest rate on record in Q2 but expected to rebound.
  • Softer retail sales in China but central bank provides additional monetary stimulus.
  • Aramco highlights resurgence in demand for oil in Asia, particularly from China.

The Federal Reserve Chairman made an important policy speech in which he outlined the Fed’s move to average inflation targeting, confirming that the Fed will tolerate periods of inflation in excess of 2%, and by implication suggesting that interest rates are likely to remain low for an extended period. Stock markets welcomed the news, however bond markets continued to sell off from their summer lows. 

The Fed statement added further fuel to the selloff in the US Dollar, which is near 2-year lows against a basket of currencies and has weakened some 9% against Sterling since the June highs. This is something of a double-edged sword for Sterling investors, helping exposure to UK domestic companies but acting as a headwind to overseas investments.

The US presidential election race has seen Joe Biden’s poll lead fall in light of the civil unrest in various US cities, which President Trump appears to be fanning to his advantage. This, and the ongoing disagreement over the role of postal voting, mean that this has the making of a particularly unpleasant election. 

In the UK, parliament returns with the Government’s popularity severely undermined by a series of U-turns during a calamitous summer. The Prime Minister has a busy autumn ahead as negotiations with the EU reach their conclusion, he must also maintain the positive momentum in the UK economy as the furlough scheme winds down. With schools reopening, an increase in people returning to offices will be particularly welcomed by town and city centres, although this progress may prompt a further resurgence in new cases.

US quarterly earnings reporting for the June quarter is now largely complete and has seen most companies ‘beat’ analyst estimates. However, with companies typically withdrawing guidance during the period, it is worth noting that analysts played it safe and took a very cautious approach in their forecasts. Nevertheless, the recovery in the stock market so far largely reflects higher valuations rather than a strong earnings recovery, and whilst the huge levels of liquidity in the system have fanned the stock market, it does look detached from reality. 

Having risen some 500% year to date, and 74% in August alone US company Tesla saw its market cap surge to some $460bn and now completely eclipses the car industry. By contrast, General Motors is valued in the region of $51bn and in 2019 shipped some 7.7 million cars compared to Tesla’s 0.36 million. Whilst the argument that it is not just a car company may be a valid one, it should be noted that the company generated just $800m of free cash flow over the last 12 months.

In stark contrast, and having had a strong 2019, the UK stock market finds itself very much in the unloved category. Acknowledging the lack of a large technology presence, we do however strongly believe that in the context of the US stock market exuberance that UK stocks are fundamentally attractive. 

Relative to global peers, the UK stock market is currently trading at its lowest forward earning multiple in 20 years. At some point, it appears increasingly likely that there will be a rotation away from those overheating areas into markets such as the UK. Whilst much of the movement in Sterling against the US Dollar has reflected dollar related factors, we would suspect it unlikely that Sterling will strengthen materially from these levels. These factors, in combination with Covid developments, not least the prevailing low mortality rate and the level of resources globally being dedicated to both vaccines and testing, serve to reassure us in our positioning.

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