The third quarter of 2020 saw less excitement in markets than was seen in the first and second quarters, as markets (and indeed the whole world) understand more about Coronavirus and how this pandemic has manifested itself into our current way of life.
I say understand more, we are of course still in the dark to some extent. Timescales for a vaccine to be approved still remain vague (11 vaccines are in Phase 3 testing – experts expect at least one of these to be ready by the middle of next year); and the subsequent timescales for a return to life as it were pre-COVID-19 is also unknown. On top of that, if you live in the UK, what restrictions, how they are imposed and who imposes them is seemingly ambiguous too!
As we discussed and expected at Investment Committee Meetings, a second wave, or resurgence, would be seen around winter (into which we are now entering); what we didn’t know was how tight restrictions would be. It is still too early to tell, but it would be the committee’s collective judgement that the approach now being adopted by the Government is counterproductive. That is not to say we believe a laissez-faire approach is appropriate; quite the opposite. Social distancing (I’m sure everyone is loving the catchy Hands, Face, Space adverts!) and protecting the vulnerable absolutely make sense. But the severity of lockdowns being proposed (and in the case of our region of Essex for example, implemented) have not been shown to effectively slow down the spread. Of course, when the virus first became part of everyday life and we knew very little, the lockdown measures imposed made sense. Better to be safe than sorry. But now we are wiser.
The economic impact around the world has been plain to see; so to impose restrictions that will hit businesses, particularly smaller ones and those in the hospitality sector, will be painful.
Having offered significant support to individuals and businesses through the Furlough Scheme, the Coronavirus Business Interruption Loan Scheme and tax payment deferrals, the initial consensus was that the statement by Mr Sunak in September was to lay out terms of how to repay this massive amount of borrowing. But, with further restrictions being imposed through local lockdowns, the Statement became the ‘Winter Economy Plan’ with further support for jobs, individuals and businesses affected by said lockdowns. And of course, we are glad the Government has stepped up to offer more support. But the key question is how (and when) will the country pay for all of this. One could argue, however, that if the country is going to borrow a significant amount of money, now is one of the cheapest times in history to do so. Despite UK debt exceeding £2 trillion for the first time, interest rates remain at all time lows of 0.1% and servicing the debt (i.e. the interest payments payable) as a percentage of GDP, remains at near record lows (around 1.9% of annual GDP).
So are we in a second wave? Well perhaps the colourful graphs offered to us by medical experts at press briefings would make it seem. At one of the more recent Downing Street conferences, a graph predicting potential case numbers showed that cases would rise substantially if there was no extra intervention from the Government. But questions should be asked about the reliability of this data.
There is no doubt that cases are rising again, but how do they compare to what we saw at the start of the outbreak? In modelling by the same experts, they predicted that ~8% of a cross-sample population in the UK were infected with COVID-19. This has been generally accepted as a fair estimation (some sampling/analysis actually yield slightly higher estimates). Regardless, the current population of the UK is 68 million, and therefore 8% of the population equates to 5.5 million having had the disease during the first few months of it reaching our shores. The number of confirmed cases over the period to end of August? 340,000. The point here is that the magnitude of number of cases this time around pales into significance compared to what we probably saw between March and June; it’s just there was insufficient testing and data captured. But they know this, or at least they should do, right?
And so, you have to wonder how decisions are made at SAGE meetings; if the evidence shows that the ‘spike’ this time around is most likely a small proportion of what we saw in Q1/Q2 and that these restrictions do little to reduce the spread of the virus (but do significant economic damage), how can the justification be to plough ahead with these draconian measures?
With all the uncertainty surrounding Coronavirus and the wider reaching impact on property, it is of little surprise that the property funds have remained shut since the start of lockdown. As we mentioned in the Q2 Portfolio Update, many of the direct property funds gated, meaning investors could not withdraw or invest money. As the volatility and uncertainty dissipates somewhat, we have seen these property funds begin to reopen to new business (and more likely to pay redemptions). The Financial Conduct Authority (FCA) is currently consulting on proposals to reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds. The new rules as proposed would require investors to give notice – potentially of up to 180 days – before their investment is redeemed. It is likely the asset management industry will fight these proposals, as restrictions like this will surely damage their reach, particularly in a world of people wanting/needing/demanding liquidity.
The four years are nearly up for Donald J Trump as he bids for his second term; his opponent this time, Joe Biden. In a time where America has been most vocal about Black Lives Matter, equal opportunities and diversity, it is perhaps somewhat ironic (and unsurprising) that their choice for next President is between two septuagenarian white men.
Whilst the polls do point to a decent majority for Joe Biden and the democratic party, it is perhaps too early to call, particularly as we have seen how well these predictive polls have fared in the past. The reason that these pollsters believe they are more accurate this time is there are fewer undecided voters (I find it implausible how one can sit on the fence when it comes to Mr Trump). What could be a more pertinent issue is how the results are announced; there is a significant probability that the republicans will be ahead on the night/following morning of the vote count. However, once the postal votes come in (which, according to Donald Trump and others are susceptible to being rigged), that is the point at which we could see the pendulum swing in favour of Biden. The result could be a highly contested result and, perhaps, lead to some kind of constitutional crisis. Lots of if’s and but’s, but whatever the result, it will no doubt be an enthralling watch.
Saying that, we in the UK aren’t exactly in a position to sit on our high horse – Brexit’s back in the news! Although the UK officially left the European Union on 31 January 2020, negotiations have still been ongoing to tie up deals with our European neighbours to ensure trading can continue smoothly. If a deal is not agreed by the end of 2020, the UK and EU would do business under WTO rules from 01 January 2021. Current noises from the UK Government intimate that British businesses should get ready for no-deal, in what appears to be a game of chicken that could end up turning out horribly wrong for BoJo and Co. At the time of writing, Boris’s 15 October deadline has been and gone; that is not to say a deal can’t still be done, but time is running out!
What has perhaps been one of the more interesting stories over the past few months has been the interjection and interference of social media and tech companies in the aforementioned US election. In the past couple of weeks a story broke pertaining to information about Joe Biden’s son and the work he was doing for a Ukrainian energy company (for which he was paid a vast sum to sit on the board). We will of course allow you to read the article at your own leisure and make your own judgement. The issue here was that Facebook and Twitter both decided this news story was not something permissible on their platforms, despite it being written by the New York Post (a mainstream news outlet with significant circulation). The reason, according to Twitter, was that it was hacked data containing private information (unlike say, Donald Trump’s tax returns freely shared several weeks prior). These are the same sites that took nearly 20 years to ban holocaust denial now banning a news article which casts doubt over their preferred Presidential candidate in just 20 seconds. Both sites have subsequently U-turned on this decision to ban the material, after facing significant backlash.
The question therefore is are these companies really open platforms for people to express their opinions, or a news media outlet? Perhaps my heckles were already up having just recently watched the Social Dilemma on Netflix (again I would recommend giving this some of your time), but these companies should be aware that this total lack of regulation (and taxation) is unsustainable. We remain vigilant over our exposure to this sector, which despite all these concerns has continued to race away (from a share price perspective) this year so far.
Although this may seem like the musings of a negative Nelly, we do have plenty of reasons to be cheerful. As we mention in the following pages, we see economic growth picking up. It is important to remember as well that, although it may seem like this is lasting forever, in the grand scheme of things this is a short term issue. Hopefully we can all look back on this in a year’s time and be thankful it’s over. From an investment viewpoint, we continue with a well diversified approach, and have continued to benefit from our portfolio positioning. If you would like more information on the performance of our portfolios, please get in touch. Once again, from all of us here at Montage, stay safe and we will hopefully see you soon.