The week to Tuesday saw global stock markets rise by 1.6%, led once again by the US market, which rose by 2.4%. In contrast, Europe declined by 1.1% and the UK by 2.3%, returns more in line with those experienced by the broader US market where mid-cap stocks gained just 0.3%, potentially dragged higher by inflows to index funds rather than investor enthusiasm. Star of the show remains US technology, which saw a rise of 4.1% on the week to deliver a very impressive 11.1% over one month.
Nationwide Building Society, which has a southern rather than national bias to its mortgage lending reported a 2% rise in average house prices in June to make 3.7% over one year. The key drivers are pent-up demand and reduced stamp duty.
This is not the only sector doing well, with motor dealerships also seeing record orders. While it is tempting to put this down to pent-up demand that will last a few months then collapse, the ongoing impact of working from home is to leave more money into people’s pockets than when they paid to commute and also paid town and city centre prices for lunches, coffees etc. This is the positive story that offsets the media and economists’ focus on struggling city and town centre businesses and the expected increase in unemployment when the furlough scheme ends.
With the Chancellor’s autumn statement approaching and government borrowing in previously unexplored territory, the government is in a difficult position. On the one hand, it needs to contain unemployment and then see it decline through the electoral cycle – which argues for low interest rates and more support schemes. On the other, it needs to bring its use of debt finance under control to reassure international investors, avoid a currency crisis and ensure its cost of borrowing remains low – which argues for higher taxes playing a larger part in funding government spending. Fortunately, the UK is not the only country facing these pressures, which greatly reduces the chances of a return to the annual October currency crisis that characterised the seventies and eighties.
Our view is that higher unemployment is negative but that it will have a smaller impact on the UK equity market corporate profits than many fear. That is in part because so many of our companies have large international operations but also because the impact of Covid-19 on business was not evenly spread. Sectors that will see the greatest numbers include retail and leisure, where part-time working is common and earnings are relatively low. Furthermore, companies that reported losses this year will offset them against future profits.
Overall, our expectation is that the government and the Bank of England will remain highly focused on ensuring growth, so interest rates will remain low and we will see selective support for the hardest-hit industries. Higher taxes or reduced tax breaks must be on the agenda but the promise of more as recovery progresses is likely to be enough to maintain confidence in the medium term.