Investment Bulletin:
August 2020

This month:

Amid macroeconomic and geopolitical uncertainty, many experts are advocating a “wait and watch” approach. However, there are several important themes for investors to be particularly aware of as they ponder portfolio positioning for the months ahead.

Expert investment views:

An innovation-digital “sweet spot” is recommended for the retail sector

Investors are urged to await clearer cues before overhauling portfolios

Emerging economies’ rising debt ratios – and political dilemmas – are flagged

Bulls are warned to mark the economic indicators coming out of China

Featuring this month’s experts:

1. A nation of (online) shopkeepers

Insights from:

In the beleaguered state that the UK economy has found itself in, it is heartening to see retail sales numbers for June delivering a positive surprise against already lofty expectations. As the UK economy emerged from lockdown, retail sales surged by 13.9% compared with May, which brought the total volume of sales back to pre-pandemic levels.

These headlines make for comforting reading in difficult times and for evidence of a V-shaped recovery, look no further. However, what these numbers reveal beyond the optimism is a shift in consumption patterns.

Almost one-third of retail spending in May and June was conducted online. The UK has for some time been ahead of its peers in terms of online sales conducted. It is clear that the UK – a small, service-oriented and well-connected country with sound infrastructure – is particularly well suited to online retailing. This will continue to put pressure on the already afflicted high streets up and down the country. But this jump, if it holds, means that structural adjustments may now have to happen a lot sooner.

The UK has for some time been ahead of its peers in terms of online sales conducted. It is clear that the UK – a small, service-oriented and well-connected country with sound infrastructure – is particularly well suited to online retailing

What does all of this mean for the economic outlook? The retail sales numbers and the most recent PMIs (Purchasing Managers Indices) both signal that economic activity is recovering at a healthy clip post-lockdown. Although, the transition to a post-pandemic world will not be smooth.

The changes already evident in the retail sector are the tip of the iceberg as digital technologies start to play a far more important part in our everyday lives. Combined with the pressures from climate change, higher levels of government debt, and the changing nature of global trade, the future looks very different from the past. As investors, we shouldn’t sit idle as the trends take hold; we should ensure that we are positioned to benefit.

Therefore, when looking to gain exposure to the winning part of the retail sector, we recommend looking for the sweet spot which lies somewhere between innovation and digital – with all products available online, of course.

Investment Risk, Stock Market

Dean Turner

Economist at UBS Global Wealth Management

2. The art of sitting still

Insights from:

A well-known theatre director once screamed at an over-gesticulating actress: “Don’t just do something, stand there.” It is good advice for investors sometimes. For us, this is a time to wait and watch.

We responded nimbly to the outset of the crisis – though we wished we had been quicker still. We reviewed our stocks and took out businesses that were cyclical, which raised our cash positions. We kept those that looked capable of riding the storm and bought stocks we had been eyeing for some time but which had looked pricey.

We have been surprised just how well markets have done since. Current levels imply that expectations for the present value of long-run US corporate profits are the same now as they were at the beginning of this year. This may be an optimistic view. What happens next may depend on discovery of a vaccine or effective treatment.

By standing still and running our winners over the past three months we have intentionally allowed equity exposure to rise again and cash to become a proportionately smaller part of portfolios

The world is going to change. Early indications from China in particular suggest coronavirus will lead to wider use of robotics and AI to reduce companies’ reliance on a vulnerable human workforce. Homeworking trialled during lockdown seems here to stay for many workers and may accelerate the decline in sectors like airlines and oil.

By standing still and running our winners over the past three months we have intentionally allowed equity exposure to rise again and cash to become a proportionately smaller part of portfolios. But it is still not obvious what happens next. We’ll wait for a clearer cue before springing into action to do anything dramatic to portfolios.

James Hambro - Billy Hughes

Billy Hughes

Portfolio Manager at James Hambro & Partners

Light bulb

Top Tip

Waiting for things to become clearer before making any significant changes to your portfolio may be a wise course at present – assuming it is already well positioned, that is. The turmoil of the past few months may mean that your portfolio has “drifted” and is now exposing you to unnecessary risks. Take your chance to speak free of charge to an expert investment manager and check your investment strategy is still in line with your goals.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. The way forward for emerging markets

Insights from:

In 1989, a British economist, John Williamson, coined the term the Washington Consensus. It lists 10 principles that emerging markets should follow if they want to become successful countries. They include free trade, floating exchange rates, free markets, democracy, strong institutions and macroeconomic stability.

However, this is very much a Western viewpoint. And, as we saw from the recent decision by China to crackdown on Hong Kong’s liberties, there is clearly a disconnect. Democracy, for one, is not seen by many an emerging market as needed to engender success.

Trump’s recent attack on China’s app providers is just one in a series of tit-for-tat actions that could escalate as we countdown to the US elections in November

This highlights two growing issues: debt and trade tensions. Emerging market debt ratios rose to 230% of gross domestic product (GDP) in the first quarter of this year (Source: Institute of International Finance). Although government stimulus has supported emerging market stock values, as has the weakening US dollar, their governments now face a dilemma. If they spend more to support growth, they will probably dig themselves into an even deeper hole of debt. Interest rates could then rise to defend local currencies. Confidence would ebb, growth would slow and asset prices would head lower. Mounting economic woes could stoke political tensions and populism.

Trump’s recent attack on China’s app providers is just one in a series of tit-for-tat actions that could escalate as we countdown to the US elections in November. Blows like these have an impact far beyond China, and do nothing to help harmony. As such, a more holistic rejection of the West’s Washington Consensus could follow. The issue though is that the approach underpins prominent financial institutions, such as the International Monetary Fund and the World Bank, at a time when emerging markets could really need their support.

Nedbank Private Wealth - Rebecca Cretney

Rebecca Cretney

Investment Counsellor at Nedbank Private Wealth

4. Indicators from the East

Insights from:

There has been plenty of discussion over whether we can use China as a leading indicator for our own immediate future, given that the authorities in the Middle Kingdom appear to have gained a high degree of control of their own COVID-19 situation. We are now not sure that we can. The nature of the Chinese government and the relatively authoritarian approach that they can take with their population probably means that they are at a significant advantage when it specifically comes to quelling COVID-19.

However, we can learn from their current economic experience. The positives are that the Chinese economy is bouncing back, and various parts of the industrial and manufacturing economies are back up towards full capacity. Furthermore, sales of larger products and activity in the housing market are also relatively healthy.

China is now back up to around 80-90% of pre-COVID economic activity, according to our specialist contacts; if it stays at around that level and that is a guide for the rest of the world, then that is a very worrying prospect

Darker clouds hang over the retail and services sector, with clear evidence that the appetite to go back to shops and restaurants is presently limited, and we have to assume that without a definitive defeat of COVID-19 or the “silver bullet” of a vaccine(s), these parts of the economy will continue to act as an anchor on overall growth.

In addition, one can’t just assume that these problem parts won’t infect and affect the rest of the economy; a company or sector can make all the products they want, but if they aren’t subsequently bought, then it will cause overcapacity issues and inefficient growth. China is now back up to around 80-90% of pre-COVID economic activity, according to our specialist contacts; if it stays at around that level and that is a guide for the rest of the world, then that is a very worrying prospect.

Thomas Becket - Psigma Investment Management

Thomas Becket

Chief Investment Officer at Punter Southall Wealth

Important information

The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.

We always advise consultation with a professional before making any investment decisions.

Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.

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