As confirmed cases of the virus continue to rise, many are moving out of riskier assets, into perceived safe havens such as gold and bonds. Analysts are looking towards the historical impact of the 2002/03 SARS outbreak as an indicator of the potential economic repercussions. Although estimates vary, the impact that SARS had on China’s Gross Domestic Product (GDP) growth is believed to have been very small. It should be noted however, this was at a time when China’s economy was not as intrinsically linked to the world, as it is today.
China is now the world’s second largest economy and generally when it struggles, this is felt across the globe. Luxury goods names such as Burberry and LVMH have already taken a hit due to falling sales in arguably their most important market. Starbucks have announced that they are closing 2000 of their Chinese outlets and have already warned that financial performance is likely to be affected. Falls in production will directly impact those countries who rely on large imports from China.
Is the virus going to be a catalyst for the longest bull run on record to come crashing down? At present, it seems unlikely. Though there are confirmed cases outside of Chinese borders, the mortality rate remains comparatively low. If the spread can be contained and managed, sentiment should improve, and we will begin to see a recovery.
Environmental, Social & Governance (ESG)
Consciousness around the decline of our planet and how our everyday actions affect it is fast becoming a part of our everyday lives. 17-year-old Swedish activist (and Time Magazine’s ‘Person of the Year’) Greta Thunberg became a household name for holding world leaders to account and for asking us all to positively change the way we interact with the world around us.
According to Morningstar, $13.5bn of new money was invested in Environmental, Social and Governance (ESG) funds in the first three quarters of 2019 and there are now over 1,000 ESG funds on the market. In a recent paper entitled “ESG Matters – Europe: Great for the world, good for returns”, Bank of America Merrill Lynch (BofAML) predicted that ESG funds based in Europe will rise by €1trn by 2030.
There has long been an argument that in order to invest ethically, you must sacrifice returns. If this was the case previously, there is increasing evidence that good returns can still be generated in this sector. BofAML firmly believes that “incorporating ESG factors could improve profitability and returns of companies across all sectors of the economy, improving the quality and longevity of business”.
Those companies who do not take ESG seriously, run the risk of being left behind. This increased pressure will be felt all the way down the market caps, but none more so than in the FTSE 100. Oscar Hjalmas Fund Manager The companies that make up the index will want to ensure that they keep their place by being at the forefront of ESG. Meaningful change will be most difficult for the biggest yielders, the miners, oil producers and tobacco makers. What this means for those income investors who rely on these dividends remains to be seen.
In Mark Carney’s final interest rate meeting as Governor of the Bank of England (BoE) on 30th January, the Monetary Policy Committee (MPC) voted 7/2 in favour of holding UK interest rates at 0.75%. Initially, weak economic data had signalled that rates would be cut, most likely to 0.50%. The decision not to cut rates was made in part due to more positive January data following December’s general election result. In addition to this, the MPC opted to remain cautious over the UK’s withdrawal from the EU on 31st January and the uncertainty which remains as a result.
Opinions differed between the MPC and ex-chancellor Sajid Javid on the potential for growth. The MPC believe that the UK will only be able to grow at an average of 1.10% over the next three years, whereas Javid believed a return to just under 3.00% is entirely possible. If growth does remain subdued, the MPC have confirmed they are poised to cut rates. Ultimately, who is correct and what the new chancellor thinks will become clear soon.
After three and a half years of uncertainty, political battles and often despair, the UK left the EU at 11pm on 31st January. Boris Johnson now has until the end of December 2020 to negotiate a deal with the EU and give the people what he promised. Until then, the UK is in a transition period and is still subject to EU rules, with trade remaining the same.
The immediate market reaction on the UK’s first post EU day was positive, with the FTSE 100 gaining 0.55% and the FTSE 250 gaining 0.30%. However, despite this, Sterling fell sharply as a result of Johnson and Michel Barnier’s respective words ahead of entering into official negotiations. Obtaining a deal favourable to the UK might not be as smooth sailing as many believed.
Oscar Hjalmas, Fund Manager