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.


Chinese Economic Output Regains Pre-Pandemic High

Chinese Q3 gross domestic product (GDP, a government-produced measure of economic output) took financial news headlines by storm Monday as the quarter’s 4.9% y/y growth put GDP above pre-pandemic levels.[i] We encountered many articles comparing recoveries in China and the West, with a common takeaway being that China is winning and the US and Europe would do well to take a few lessons from its handling of the pandemic. We think it is worth turning a critical eye on that thesis, and in our view, a proper comparison suggests China’s experience is more of a preview for Europe and the US than a sign of economic superiority.

As for China itself, the results were overall positive, in our view. Monthly data showed retail sales and imports back in positive territory on a year-over-year growth rate basis in September, suggesting domestic consumption is recovering nicely—undercutting widespread warnings that the broader recovery is a mirage of government spending on infrastructure.[ii] Even if you don’t own shares of any mainland Chinese companies, broad growth in the world’s second-largest economy is a plus for global GDP and demand for goods produced elsewhere.[iii]

Some commentators argued China’s apparently faster rebound than Europe and America’s is a product of unique success in staving off COVID-19. We think this is a stretch on a couple of fronts. One, we saw numerous articles arguing the country has avoided a second wave. That may be true as far as the official numbers are concerned, but we think this strains credulity. For instance, last week Chinese officials mandated—and reportedly completed—testing for every last person in the coastal city of Qingdao after discovering 13 cases of local transmission. That is 11 million people. They turned up … zero new cases.[iv] That seems like just a bit of a stretch in light of those 13 cases and what researchers globally have discovered about how the virus spreads over the past 9 months (as documented in numerous scientific publications). We aren’t saying it is impossible, just highly improbable. Particularly when the international medical community has warned for months that virus data from China are suspect given the regime’s well-documented lack of transparency.[v]

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What If the Bank of England Goes Negative?

For months, one question has preoccupied financial new commentators we follow: Is the Bank of England (BoE) about to take short-term interest rates negative in the UK? Monetary policymakers at the BoE have admitted in various comments that it is under discussion. Whilst BoE Governor Andrew Bailey recently said it wasn’t on the docket, his institution sent UK banks a letter on Monday asking them to explain their “current readiness to deal with” zero percent or negative rates.[i] This seemingly prompted a large media backlash, with many financial commentators we follow warning about looming trouble for banks’ earnings and savers’ deposits if rates drop below zero. In our view, there is some merit to this criticism, however overstated it might be, and considering these risks can help peoples set expectations. On the bright side, though, our research shows negative rates haven’t caused recession or bear markets in other countries using them in recent years.

The interest rate in question is the Bank Rate, which is the rate the BoE pays on reserves banks hold there. It is also the primary influence on the rate banks pay to borrow from each other as well as the interest rate on savings accounts. In theory, the purpose of taking a benchmark rate like the Bank Rate negative is to discourage banks from hoarding reserves. If banks must pay the BoE to store their excess reserves instead of earning a tiny return on them, the theory goes, banks will find lending more attractive—stimulating the economy as banks extend more funding to households and businesses.

It is a nice seeming theory, but reality hasn’t totally proven it to be true. In the eurozone, the European Central Bank (ECB) adopted negative rates in June 2014. At the time, loan growth was negative—tied to the eurozone’s sovereign debt crisis-driven regional recession—as Exhibit 1 shows. It did improve from there, returning to positive year-over-year growth in February 2015 and accelerating in the months and years ahead. But relative to the eurozone’s history, loan growth in the negative rates era wasn’t robust—it was in line with the recovery from the financial crisis, before the debt crisis, but far below the economic expansion that ended in 2007.

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Our Perspective on the UK’s August Slowdown

The UK released monthly gross domestic product (GDP, a government-produced estimate of economic output) for August last Friday, and with growth slowing from July’s 6.4% m/m to 2.1%, most headlines we encountered focused on the seemingly fizzling recovery.[i] With growth cooling and new restrictions in local COVID hotspots already starting to bite—whilst GDP remains -9.2% below its pre-pandemic peak in February—many financial commentators we follow warn the road ahead will be long and arduous.[ii] We won’t argue everything from here will be smooth sailing, especially with the limits on activity announced on Monday. But when digging into the data, we found some interesting tidbits indicating the UK’s economic foundation is a lot stronger than many commentators give it credit for and—for better or worse—reopenings and restrictions likely remain the swing factor. That doesn’t necessarily make life easier for investors, since these are inherently unpredictable political decisions, but we think it does suggest weak economic fundamentals aren’t reason to shun UK shares.

The first interesting nugget comes from page three of the Office for National Statistics’ press release for August monthly GDP: “The accommodation and food services sub-sector contributed 1.25 percentage points to the 2.1% growth in GDP for August 2020, as the combined impact of easing lockdown restrictions, Eat Out to Help Out Scheme and ‘stay-cations’ boosted consumer demand.” Now, pessimists could logically read this and scoff that GDP was artificially inflated by government largesse, and if it can’t even grow well without the government picking up the tab when people dine out, then things must be dire indeed. As people who generally think most sustainable growth comes from the private sector, we won’t try to talk readers out of that general viewpoint if they hold it. But we think there is another way to view this without casting judgment for or against Eat Out to Help Out: People went out, full stop. As the UK and other nations started reopening in late spring and early summer, the big worry we saw throughout the financial news was that society’s fear of COVID-19 would keep people home and out of restaurants, sapping reopening’s power to generate an economic recovery. Indoor dining was supposedly the most vulnerable to this. But we think August’s results prove that decisively false. Setting aside quibbles over who picked up the tab, we think the simple fact people actually felt comfortable leaving the house and lingering at their local watering hole suggests that whole notion of psychological scarring causing economic scarring was off base.

The second set of fun facts comes from page five of the press release, which looks at Services’ 14 sub-sectors. Of those 14, 12 remain below pre-COVID output levels, which we don’t find surprising. But we were rather struck by which industries are struggling the worst. As Exhibit 1 shows, that includes all the items we wouldn’t rationally expect to recover until the virus is old news and no longer threatens the masses. Stuff like air travel. Rail transport. Entertainment. Elective health care. Paid domestic work. These are all largely still offline. Whatever your opinion of the merits of this, until life on these fronts returns to normal, these areas will likely remain sore spots. But when they do reopen, we think August’s hospitality boom suggests they can recover a lot faster than people might expect.

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On President Trump’s Positive COVID Test

Editors’ Note: MarketMinder is intentionally nonpartisan. We favour no political party or politician and assess political developments solely for their potential economic and market impact.

Thursday afternoon in the US, news broke that a top White House aide, Hope Hicks, fell ill with COVID—leading many commentators we follow to worry the virus would have spread to other officials, including President Donald Trump. At about 10PM on America’s West Coast, tests confirmed it: Both President Trump and First Lady Melania Trump were COVID-positive and quarantining. US overnight equity futures (securities that represent an agreement to buy shares at a set price) immediately dipped—and the S&P 500 fell on Friday overall—which we don’t find surprising as this October surprise stokes uncertainty somewhat.[i] It also fuels a tremendous amount of speculation about what it all means for the election—and, correspondingly, equity markets. The chatter throughout the financial news world escalated on Friday with news that the president was hospitalised and taking an experimental drug to treat the infection. In our view, investors should avoid this vortex of speculation. The impact on the election is entirely unknowable, and we think equities’ dip Friday is likely a short-term sentiment reaction—probably fleeting. Making too much of this is a bias-laden minefield, in our view.

Given that the US election is only a month away, it is perhaps natural that the minute this news hit, political commentators went into overdrive trying to discern the infection’s possible impact. Amongst the most common theories we have seen:

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A Look at the Developed World’s Active Political Front Last Week

Editors’ note: MarketMinder is politically agnostic, favouring no party or politician in any country. Our assessments here focus solely on political developments’ potential economic and financial market impact—or lack thereof.

Last week there were a number of notable political events around the developed world. Here is a quick round-up featuring Italian regional elections, scandal-plagued Canadian Prime Minister Justin Trudeau reopening Parliament and UK Chancellor of the Exchequer Rishi Sunak unveiling a new COVID fiscal response.

Italian Centre(-Left) Holds

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Why Long-Term Investors Should Avoid Leaping to Conclusions on Europe’s Renewed Restrictions

Is the second lockdown beginning—and truncating a nascent recovery in summertime economic data along with it? That is the question posed by many financial commentators we follow as COVID case counts rise anew in Europe and new restrictions begin to materialise. A handful of French and Spanish cities announced new limits on activity over the past week, and UK Prime Minister Boris Johnson announced nationwide measures that will last for six months. Whilst these restrictions aren’t anywhere near as draconian as those implemented globally in March, headlines warn they are just the tip of the iceberg, jeopardising the recovery from this year’s global recession—and the bull market (prolonged period of rising equity markets) that began in March.[i] In our view, it is probably fair to presume new restrictions will slow economic growth this autumn and perhaps even cause data to wobble somewhat. But for investors, we think the most important question is always: Is reality better or worse than what equity markets have already anticipated? With many commentators globally warning of a disastrous second lockdown and devastating double-dip recession for months, we think reality thus far is shaping up better than feared. New restrictions can knock sentiment short term, which our research shows can contribute to market volatility. But in our view, there would need to be a massively negative surprise for equities to slip into a second bear market (equity market decline, driven by fundamentally negative developments, of -20% or worse).

Hard as it can be to remember when bad news arrives, a wide body of research—including our own—shows equity markets are forward-looking. In our view, they reflect the likely reality over the next 3 – 30 months, based on all information at their disposal—including economic forecasts, headlines, big fears, data and all other news and opinions. For the past six months at least, we have seen a vast array of headlines warning of a potential second wave of the virus. Even as case counts dwindled in the late spring and summer, many commentators we follow warned it was a temporary reprieve, and once colder weather forced everyone inside, the virus would flare up exponentially—paralleling the 1918 flu pandemic. With conventional wisdom crediting stay-at-home orders with containing the virus earlier this year, many commentators have argued for months that an autumn or winter return to full-fledged lockdowns was a foregone conclusion. Meanwhile, global equity markets kept rising until Tech-related jitters and other issues knocked sentiment this month.[ii] In our experience, when shares rise through widespread fears, they are most likely signalling they have dealt with these fears—and reality is unlikely to be anywhere near as bad as most people suspect.

That signal appears to us to be valid, based on everything we know now. None of the new restrictions—in France, Madrid or the UK—are anywhere close to what the world lived through six months ago. The affected French cities will still let stores, restaurants and bars operate, with restrictions limiting capacity and operating hours.[iii] That isn’t great for the affected businesses, in our opinion, but it is far better than early 2020. Madrid’s new restrictions are similar and confined to areas of the city where there are 1,000 infections per 100,000 residents.[iv] As for the UK, shops and restaurants in city centres that depend on office workers will no doubt struggle, as the government is urging everyone who can to work from home. But there, too, stores and restaurants will remain open, albeit with curtailed operating hours, and most social gatherings are now limited to six people.[v] Yes, economic activity may fall compared to August. But simply having most businesses open is a world away from the widely feared full lockdown redux. For stocks, less bad than feared qualifies as a positive surprise, in our view.

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On the UK’s Trade Deal With Japan

So much for the UK ruining its international reputation and reliability as a treaty partner. When rumblings arose throughout the international political community early last week of Prime Minister Boris Johnson’s government potentially violating international law by reneging on part of the Brexit Withdrawal Agreement, some politicians declared the UK’s reputation tarnished—allegedly near-guaranteeing no country would sign a free-trade agreement with them and that Brexit would be disastrous for trade. Yet last Friday, the UK turned this narrative on its head, agreeing in principle to a free-trade deal—its first as an independent country in nearly 50 years—with Japan, the world’s third-largest economy. In our view, this is further evidence Brexit just isn’t the isolationist, protectionist nightmare headlines frequently portray.

According to the Department for International Trade, the agreement will boost annual trade between the UK and Japan by £15.2 billion—with 99% of exports to Japan tariff-free.[i] For reference, the UK’s total trade (exports plus imports) with Japan amounted to £29.1 billion in 2018.[ii] The deal will liberalise rules of origin, allowing more products (e.g., UK biscuits and some types of clothing) to qualify for tariff-free trade. Some digital provisions—notably, data localisation—mean companies won’t have to set up offshore servers to continue doing business, which we think is likely to benefit British financial services companies and Japanese videogame makers. Moreover, Japanese automakers will see tariff reductions for 92% of automotive parts, whilst UK dairy farmers will get tariff-free access to Japan for some of their cheeses—a notable compromise given the issue nearly derailed negotiations.[iii]

Whilst some financial commentators we follow are highlighting the big-sounding headline numbers, reality suggests the economic benefits are modest given each country sends only about 2% of its total goods exports to each other.[iv] Yet the UK-Japan agreement is more significant for what it symbolises, in our view. Namely, all the hubbub about an inward-turning, unreliable, backtracking UK isn’t dissuading other countries from signing deals. The UK and Japan are even treating their deal as the next step for the UK to eventually join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—an 11-member free-trade agreement spanning the Pacific.[v] Tied to that, Trade Secretary Liz Truss confirmed publicly last week trade talks were back on with Canada.

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Yoshihide Suga Takes the Reins in Japan

Editors’ Note: MarketMinder is politically agnostic, and we favour no politician or party in any country. We assess political developments solely for their potential economic and financial market impact.

Japan’s Liberal Democratic Party (LDP) confirmed now-former Chief Cabinet Secretary Yoshihide Suga as its new president on Monday, paving the way for him to succeed Shinzo Abe as prime minister when the legislature votes on Wednesday. Aside from introducing a bit of political uncertainty over the potential for a snap election, we think the appointment mostly extends the status quo for Japanese politics—and politics’ influence on the country’s economy and equity markets.

Most of the news commentary on Suga we have seen focuses on his somewhat unusual background for a high-ranking politician in Japan. Unlike every other prime minister in the past two decades, he doesn’t come from a prominent political family. Rather, he comes from a rural town where his father was a strawberry farmer (yum) and his mother a school teacher. He worked at a cardboard factory to put himself through school. He is also famous for his love of pancakes, sit-ups and a morning walk. However, our research shows equity markets generally don’t care whether a country’s leader has a sweet tooth or a strong core—policy is what matters, and on that front, we think Suga is likely to continue his predecessor’s initiatives. As cabinet chief, he was not only Abe’s personal fixer—the guy who corralled the vast bureaucracy—but also reportedly the architect of Abe’s economic initiatives. Therefore, we think it is unlikely the government will suddenly begin lobbying the Bank of Japan to let up on its asset purchases, which aim to boost the economy by keeping long-term interest rates close to zero. Public spending plans probably won’t change much, either, in our view. Suga has suggested a third consumption tax hike to address Japan’s public deficit and debt, but for now, based on several policymakers’ public comments, the government’s chief priority appears to be shepherding an economic recovery whilst managing COVID-19. In our view, a tax hike would likely not help much on this front.

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Brexit Brinksmanship Returns

Editors’ Note: As always, MarketMinder is politically agnostic. We favour no politician or political party and have no position for or against Brexit or similar geopolitical developments. We assess this and all political issues solely for their potential economic and financial market impact.

With COVID-19 dominating 2020, one of the past few years’ biggest headline grabbers had taken a backseat eight months in. But now Brexit is back—and stealing headlines with a vengeance. Some financial commentators we follow are going so far as to claim the UK government has introduced legislation that violates the exit agreement it struck with the EU last year, rekindling the risk of a messy, de facto no-deal Brexit. However, whilst the specific twists that bring it back to the fore are new and lead many commentators to project potential damage to Britain’s economy, we think the takeaway remains the same: However it plays out, equity markets should gradually gain clarity as the year progresses, and even a no-deal Brexit shouldn’t bring disaster.

With free-trade negotiations between the UK and EU restarting, Prime Minister Boris Johnson introduced legislation called the Internal Market Bill. In related comments, his government portrayed it as a “legal safety net” for the UK in the event the country fails to ratify a free-trade agreement with the EU by year-end, when the post-Brexit transition period expires. Their stated aim was to set out the legal framework (including customs rules) for trade with the EU if Brexit happens without a trade deal in place—theoretically giving businesses and investors more clarity.

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Explaining 2020’s UK Equity Market Underperformance

Whilst global equity markets have reached pre-pandemic highs, UK markets have clawed only about halfway back from their low and are 24.1 percentage points behind global returns year to date.[i] Resurgent Brexit worries are probably contributing to the lag, but we think the main explanation is UK equity markets’ heavy tilt towards value shares—companies more sensitive to economic conditions that typically invest less in growth-orientated endeavours and whose shares generally trade at lower prices relative to expectations for the company’s future earnings. This year, value shares have underperformed their counterpart, growth shares—companies that tend to focus on growing their earnings and revenues over time and typically trade at relatively higher prices compared to expectations for the company’s future earnings.[ii] In our view, growth is likely to continue leading as this new bull market develops (a bull market is a prolonged period of generally rising equity markets). For UK investors, we think UK markets’ 2020 struggles underscore the importance of global diversification.

Value shares—like those in the Financials and Energy sectors, amongst others—have trailed growth during this new bull market.[iii] Our research indicates this is unusual. Value-orientated companies usually depend more on underlying economic growth to turn a profit. Hence, their shares typically get pummelled most in bear markets’ latter stages (a bear market is a fundamentally driven equity market decline of -20% or worse) as investors question whether they will survive the accompanying recession—and our research shows value shares typically bounce back fastest early in the ensuing bull market as those fears fade.

However, we think February – March’s bear market was so sudden and short that fear over value firms’ survival lacked time to build as it normally does. That means less of a relief bounce, in our view. Consistent with this, the previous bull market’s leadership trends didn’t reverse: Growth-orientated firms led going into the bear market, during, and since.

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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.