MarketMinder Europe 

MarketMinder Europe

MarketMinder Europe provides our perspective on current issues in financial markets, investing and economics. Our goal is to analyse key topics in an entertaining and easy to understand manner, helping you see the news of the day in a unique perspective.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.


Separate Your Equity Market Views

Following awful returns in 2020’s first quarter, equities started Q2 on a rocky note as investors seemingly reckoned with the American government’s grim COVID-19 projections, the UK’s mounting casualty rate and revelations that testing in Britain lags other European nations.[i] Even as fresh data showed infection rates slowing in badly hit Italy and Spain, the large numbers of forecasted deaths elsewhere may have understandably hit sentiment.[ii] We will leave it to the epidemiologists to assess whether the latest projections are likely to prove accurate as social distancing protocols remain in place for the foreseeable future. As ever, our concern is capital markets and our readers’ financial futures. To that end, we offer a simple piece of counsel: To navigate markets at this juncture, we think it is vital for investors seeking long-term growth to mentally separate the disease, containment efforts’ economic impact, and equity markets. The three are unlikely to move in lockstep, in our view, with equities likely to improve before the other two.

Because this bear market materialised with record-breaking speed, it can be hard to see that markets actually worked as our research shows they usually do, pricing in the near future before the facts on the ground confirmed it.[iii] World stocks peaked on 20 February.[iv] At the time, there were relatively few confirmed cases in America and Europe. No developed nations were officially on lockdown yet, and few major events had been cancelled. Just over three weeks later, on 12 March, the MSCI World Index officially crossed into bear market territory (a decline of greater than -20% from an index high point).[v] By then, Italy was mostly locked down, whilst America and most other nations were curbing mass gatherings. Concerts, festivals, sporting events and other major gatherings were cancelled, but businesses were still open and American state governments hadn’t yet begun ordering residents to cease all non-essential activity and stay at home. Those orders began taking the following week, starting in California on St. Patrick’s Day and then eventually spreading to the East Coast. At the same time, the UK government was gradually ratcheting up its own “social distancing” guidelines, culminating in the wide-ranging restrictions announced 23 March. The following day, the developed world received its first round of data confirming a deep economic contraction had begun: IHS Markit’s Flash Purchasing Managers’ Indexes for March.[vi] Yet as we write, global markets’ lowpoint to date was 16 March.[vii] Equities approached that low again on 23 March, but they rose through the month’s end.[viii] We have no idea if this will hold, which will only be clear in hindsight. But that isn’t our point here. In our view, equities downdraft preceding economic data is compelling evidence that equity markets move before the economy.

This is why we think it is critical, if challenging, to separate medical statistics and projections out of your equity market analysis. For instance, we have seen the big numbers in the American government’s projections on Wednesday morning used in other communications from the medical community and mainstream news outlets for the past couple weeks. They may be new to an official government slideshow, but they are likely not new to investors. Because they were public, we think it stands to reason that people have been buying and selling for several days with knowledge of these numbers, registering their opinions about them. Hence, we suspect they are already reflected in equity prices, alongside the initial sharp economic contraction stemming from the efforts to contain them.

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Some Basics to Guard Against Hucksters and Financial Thieves

As investors deal with the challenges of a bear market (a long, fundamentally driven equity market decline of -20% or worse)—already a difficult prospect—we think they must also be on guard against another threat. This one comes from their fellow humans, unfortunately. The Pensions Regulator (TPR) recently warned savers they face higher risk of exploitation by scammers during this crisis.[i] Whilst fraudsters are always active, in our experience, we have found many of their plots come to light and make headlines during bear markets—like Bernie Madoff’s famous 2008 scam, which emerged only after the big bear market led many of his clients to seek withdrawals. Upon demanding their funds, they discovered their money was gone—stolen. But sharp volatility can also sow the seeds of future schemes, as we have observed many investors’ frazzled nerves have them clamouring for supposedly “safe” investments with good returns and no downside. With that in mind, we think investors would benefit from an explanation of how these plots generally look—and how to help guard against them.

When equity investors endure a large portfolio decline, in our experience, it often tends to weigh on their emotions. Seeing a large portion of one’s retirement savings vanish can heighten the appeal of an investment that seems “safe” and steady—a way to earn equity-like returns with less, or no, downside risk. Yet this is a fantasy. No financial product can provide returns approaching equities’ historical long-term returns without risk, in our view.

Ken Fisher, the founder of Fisher Investments UK, studied financial fraud schemes extensively for his 2009 book, How to Smell a Rat. In his research, he found many scammers would pitch fancy strategies and tactics featuring relatively high upside and, critically, no downside. Consider: Since 1985, the MSCI World Index’s average annualised return (meaning, the cumulative return transformed into a compound annual growth rate) is 8.9%.[ii] Hypothetically, a fraudster may say their product delivers a return that is modestly under that average, but, temptingly, without any of the associated negative volatility.

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Early March Data Echo Equities’ Downturn

For the past five weeks, equity markets have been quickly pricing in the escalating likelihood of a global recession stemming from the world’s efforts to contain the spread of COVID-19. Now, courtesy of IHS Markit’s Flash March Purchasing Managers’ Indexes (PMIs) for major developed nations, we have the first economic data read on the situation. We agree with the financial world’s general verdict that the numbers are awful. In our view, that makes now a crucial time to remember equity markets typically lead economic data, not the other way around.

PMIs are surveys, conducted monthly, of thousands of private businesses. Each business reports whether activity rose, fell or held steady versus the prior month in a handful of categories—including output, new business, new export business, employment and supplier delivery times. They also report on more subjective indicators, including expectations for future business, and tangentially related issues such as prices. IHS Markit then compiles all the responses into headline indicators for manufacturing, services and a composite of all businesses. Readings correspond to the percentage of businesses reporting expansion, with results over 50 generally signalling economic growth and under 50 implying contraction, according to the surveys’ methodology. These aren’t perfect indicators, in our view, as they don’t measure the magnitude of that growth or contraction. But they are timely, and the flash readings—early tallies containing about 85% of responses for the month—are especially so. Hence, we find them quite useful.

With that explainer out of the way, Exhibit 1 displays this month’s flash PMIs. We encourage readers to take a deep breath before looking.

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This Bear’s Evolving Fears Seemingly Parallel the Past

In the past few days, our perusal of financial news coverage indicates investors’ fear has mushroomed beyond COVID-19 containment efforts and their immediate fallout. As the dollar has strengthened—normal during a recession and bear market (a prolonged, fundamentally driven decline in share prices of -20% or greater)—so too, apparently, have fears of companies and governments elsewhere struggling to service dollar-denominated debt. We also see some arguing the pound’s decline reflects a lower likelihood of signing a trade deal with the EU before the 31 December deadline, as well as the UK economy’s vulnerability to a financial crisis given London’s standing as a financial services hub. The gyrating market for corporate debt is seemingly fanning fears of an allegedly long-overdue reckoning in riskier debt securities. Rising sovereign yields appear to have brought Italian debt crisis fears back. Worries of imminent collapse in a smattering of industries—including travel, autos and retail—seem widespread, often carrying a tinge of “this time is different” from the many historical downturns preceding this one. We won’t try debunking any of these for now—we think there will be a time for that later. Rather, we will simply highlight our view that spiralling, spreading fear—a hunt for “the next shoe to drop”—is normal as a bear market worsens and generally not a roadblock to its eventual end.

We think past bear markets provide ample evidence for this. During the last global bear market in 2007 – 2009, fears appeared to morph from banks and subprime mortgages to America’s auto industry, potential hyperinflation due to aggressive monetary policy and a years-long recession on par with the early 1930s. Bank bailouts and fiscal stimulus efforts seemingly drove fears of spiralling debt and deficits. News headlines in late 2008 indicate the surging dollar had many fearing a reckoning; when this reversed course and weakened, we recall headlines touting fears of a dollar crisis. Toward the bear’s end, we even observed people speculating that equity markets could go to zero. Morphing panic is part of a bear market’s evolution, in our view.

We think the 2000 – 2003 bear market had a similar fear morph as the dot-com implosion rippled throughout the broader economy. The tragedy of 9/11, which occurred a year and a half into America’s bear market and six months into an American recession, appeared to add airline industry woes and related pension dread—plus fears over prolonged armed conflict in the Middle East. Accounting scandals at the Energy company Enron and other corporations seemingly drove worries that no company’s financial books were reliable.

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Here Comes the Stimulus

For the past couple weeks, equity markets have dealt with the increasing likelihood of recession (a prolonged, broad-based contraction in economic activity) resulting from the societal efforts to contain or slow COVID-19 in Europe, the UK and North America. Now, the same governments are seemingly trying to ride to the rescue. Just one week after announcing £50 billion worth of help, the British government announced an additional £350 billion in business lifelines, support for private lending and tax relief Tuesday.[i] Several European nations, including France and Germany, have also unleashed billions of euros in fiscal stimulus and effectively suspended the EU’s self-imposed government deficit and debt limits.[ii] The US, too, is considering around $1 trillion (roughly £870 billion) in various forms of stimulus.[iii] Without having any specifics or actual legislation to assess in most of these nations, a deep dive on winners and losers globally is premature, in our view. For now, we think it is important to simply acknowledge the massive wave of money lurking and help investors set reasonable expectations on what it is likely—and unlikely—to do.

First and foremost, we don’t think fiscal stimulus (or monetary policy, like interest rate reductions and asset purchases) can stop the economic consequences of closures, outages and interruptions to business. Nor, in our view, can it reopen the stores, restaurants and tube stations that close either voluntarily or due to local emergency restrictions. It won’t prevent a possible approaching shutdown of most commerce and movement in London. It can’t heal the sick, keep schools open past Friday or return people to the workforce. Most importantly, it can’t force COVID-19 to fade with flu season a month or so from now. Only when COVID-19 fades is life in the UK and elsewhere likely to start returning to normal, in our view—and that likely happens when it happens regardless of how much stimulus governments unveil.

So governments and central banks aren’t saviours, in our view. But crucially, we don’t think the global economy and markets need a saviour. Not because of anything unique about this bear market (a prolonged, fundamentally driven decline in share prices of -20% or greater), but because recessions typically end with or without stimulus. Equities move in advance of economic data, and our research indicates many bull markets have begun long before data improved. The last bull market (a prolonged period of generally rising share prices) began in March 2009, when unemployment was rising and GDP (a government-produced measure of economic output) was falling in most countries.[iv] The recession didn’t end in America and Britain until that July—and data revealing those green shoots didn’t come out until late summer and early autumn, nearly six months after shares bottomed.[v] In our view, this shows equities don’t wait for improved data. Rather, we think all they need is sentiment becoming overly pessimistic, creating an easy benchmark for a not-as-bad-as-feared reality to beat.

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Coronavirus: Seeing Through the Fog of Fear

Considering coronavirus coverage dominates nearly every news website, broadcast, blog, social media outlet and publication, we think it is clear information—and, sadly, misinformation—about it abounds. That slew of coverage is seemingly fanning fear, which makes focusing on facts currently known about the outbreak much more urgent, in our view. Now, we aren’t physicians or scientists that research contagious diseases. Neither of us studied medicine. We claim no real or advanced knowledge of such matters. But part of what we do is analyse media—our team covers dozens of outlets daily from around the world. Collectively, we have read hundreds of articles on the subject—and found some significant overlap across various experts about what they say is accurate and what isn’t. Whilst there are still some significant unknowns about the outbreak, we thought rounding up our findings may help readers. Now, of course, all this could change—and some statistics surely will—but we hope to provide you as good a basis for seeing this as possible now, given extant fear over the issue. Without further ado, here we go.

How Many People Have the Coronavirus?

Most outlets we have reviewed cite the total number of identified cases in response to that question. As of 11 March, Johns Hopkins University’s dashboard (which you can view here) cites 121,564 coronavirus diagnoses. However, there are a few caveats to this. One, that doesn’t deduct the number of patients who have recovered or, tragically, died. The same resource counts 66,239 patients as having recovered from the virus and 4,373 having died. Hence, these data show 50,952 persons currently known to have coronavirus globally.

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Our Perspective on Oil and Equity Markets’ Continued Volatility

Ouch. That is the first word that leaps to mind after Monday’s big financial market volatility. Equities plunged globally after Saudi Arabia flipped from trying to agree production cuts to slashing its oil price and pledging to increase output. That sent global crude oil prices down -30% Monday morning, before they recovered somewhat.[i] The FTSE 100 fell -7.7% on the day, its sharpest drop since 2008’s Global Financial Crisis.[ii] It closed -22.2% below its 17 January year-to-date high, whilst the MSCI World Index—which covers all global developed equity markets—closed the day -19.0% below its own prior high on 20 February.[iii] Many define a bear market as an equity market decline that breaches -20%. That places the FTSE 100 in technical bear territory, with global markets close to this threshold. However, as we shall discuss shortly, magnitude alone doesn’t determine whether a decline is a bear market, in our opinion. Based on its other characteristics, including its speed and the prevailing investor sentiment, we think this decline is much more consistent with an equity market correction, when is generally more fleeting. Whilst there is no way to know how much longer this volatility will continue, we think investors seeking long-term growth will benefit most from staying cool and awaiting the recovery that we think awaits.

At this juncture, we think deciding whether to call this drop a correction or bear simply because the FTSE has crossed -20% is a distinction without forward-looking meaning. Whatever you call such a move, equity market history shows quick, steep drops tend to reverse about as swiftly.[iv] Absent a major, lasting, fundamental negative—which we don’t think coronavirus fears or weak oil prices amount to—the rebound shouldn’t be far off, in our opinion.

The general sentiment in press coverage of Monday’s volatility appears to be that plunging oil prices add another blow on top of the coronavirus, all but assuring a global recession. In years past, many investors likely would have cheered such low oil prices as economic stimulus, arguing it gives consumers more flexibility to spend on discretionary items. But in 2014, the last time oil plunged, it didn’t have a material effect on consumer spending, and it forced oil firms to reduce investment. Their cutbacks rippled through oil-dependent economies as well as global manufacturing, causing a mid-cycle economic slowdown that lasted into early 2016. As a result, pundits are now penciling in another round of cutbacks—and worse. Many smaller American Energy producers have weaker balance sheets now than the last time around and risk running out of cash if they can’t continue tapping borrowers, causing a twin fear of bankruptcies wreaking havoc in the sector, potentially triggering a chain reaction through broader credit markets and the economy.

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The Real Lesson From the Labour Party’s Nationalisation Chatter

Editors’ Note: Our political commentary is intentionally non-partisan. We favour no political party, candidate, policy or programme. We assess political developments solely for their potential economic and market impact and think political bias invites investing errors. Additionally, MarketMinder doesn’t recommend individual securities. The below merely represent a broader theme we wish to highlight.

The UK’s general election campaign kicked into high gear last week, and there were some noteworthy events. Parties selected their candidates. The Brexit Party decided not to stand in the 317 constituencies the Conservative Party won in 2017, an apparent attempt to keep from splitting the pro-Brexit vote. Prime Minister Boris Johnson mopped a floor awkwardly and answered a television presenter’s question about what makes him “relatable” by first musing on how many relatives he has, then declaring it “the most difficult psychological question ever.” Oh, and Labour Party leader Jeremy Corbyn pledged to nationalise the broadband arm of BT Group, setting off a national frenzy. Johnson called it a “crazed communist scheme,” which seems a little over the top in our opinion, but hey, this is politics. As always, we aim to stay above the partisan fray, and our interest is more in the potential implications for investors. BT pays an 8% dividend, according to FactSet, and we have seen a lot of chatter in financial news sites we monitor arguing Labour’s plan destroying pensioners’ cash flow if it were to take effect. This also seems a little over the top, as we will explain, but the general discussion also shows why we think it is a mistake to rely on dividends alone for cash flow.

Corbyn’s plan aims to address the UK’s slow fibre optic broadband rollout. According to The Guardian, only 8% of UK households have full-fibre broadband, compared to 71% in Spain. To “fix” this, a Corbyn government would nationalise BT’s broadband operations (and potentially those of its competitors) and use a tax on Tech multinationals to fund a massive infrastructure buildout. Corbyn claims this would give every home and business “free” full-fibre broadband by 2030.

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Putting Germany’s Q2 Contraction Into Perspective

-0.1%. 0.2%. 0.4%. -0.1%. These, in chronological order, are Germany’s real, quarter-over-quarter gross domestic product (GDP, a government-produced estimate of national economic output) growth rates in each of the past four quarters.[i] According to some headlines from financial publications we regularly review, Q2’s dip is a sign Germany’s “golden decade” is ending and recession is nigh. Never mind that when GDP shrank by the same percentage in Q3 2018, it snapped back and grew in each of the next two quarters. We think that should be your first clue that Q2’s wee contraction is neither predictive nor automatically the end of the line—for Germany’s economy, the world or equity markets.

A popular theme amongst news outlets we read is that German weakness results from Brexit dread and the US and China’s trade war. Pundits cite Germany’s export-heavy economy and claim these trade headwinds are severe threats, citing German exports’ -1.3% q/q decline in Q2, which the country’s federal statistics office described as the worst result in six years.[ii] Industry analysts we follow see falling car demand in China, connect it to the trade spat, and pen laments for Germany’s vaunted automakers. Some in our perusal of the financial press acknowledge Germany’s services sector is chugging along fine, but they warn weak manufacturing is a bellwether and malaise will soon befall the entire country. At first blush, household spending growth’s sharp slowdown from 0.8% q/q in Q1 to 0.1% q/q might seem to support this viewpoint.[iii] So might gross fixed capital formation’s -0.1% q/q decline, although negativity here was confined to the construction sector—investment in machinery and equipment and other products rose.[iv] With financial pundits widely considering Germany the eurozone’s pillar of strength, many presume it is only a matter of time before the broader eurozone economy gets sucked into the vortex.

Now, economic data are seldom black and white, and we think there are kernels of truth in some of these claims. German exports to the UK stumbled in Q2, a likely sign of Brexit uncertainty’s international reach.[v] Several reports have shown that when Brits thought Brexit would happen on 29 March and feared it could be a no-deal exit, they stockpiled goods—including finished goods and components from Germany and other eurozone trading partners. When Brexit got delayed, Brits could work through them without needing to send German suppliers new orders. This likely isn’t a long-term headwind, as events like this usually just pull demand forward temporarily, in our view, but it probably was a factor in Q2.

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Quick Hit: July UK and US Retail Sales

After recent market turbulence, UK and US consumers seemed to provide a reprieve. July retail sales for both countries rose, and some headlines heralded consumers as a bright spot in a stormy global economy—though pundits still fretted manufacturing weakness eventually spilling over. Whilst retail sales don’t capture all of consumer spending, we think the latest numbers add further evidence that the non-industrial parts of the UK and US economies, which happen to represent the majority of GDP, are faring fine.  

In the UK, July retail sales rose 0.2% m/m (3.3% y/y).[i] Across the Atlantic, they grew 0.7% m/m (3.5% y/y).[ii] Both beat expectations (for -0.3% in the UK, 0.3% in the US).[iii] Whilst headlines cheered the growthy July, these summertime figures aren’t out of line with retail sales’ expansionary 2019.

Exhibit 1: UK Retail Sales

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Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.