WEEKLY FAYRE – Monday, 19th October 2020

October 19, 2020

Because I could not stop for Death –
He kindly stopped for me –
The Carriage held but just Ourselves –
And Immortality.

We slowly drove – He knew no haste
And I had put away
My labor and my leisure too,
For His Civility –

We passed the School, where Children strove
At Recess – in the Ring –
We passed the Fields of Gazing Grain –
We passed the Setting Sun –

Or rather – He passed Us –
The Dews drew quivering and Chill –
For only Gossamer, my Gown –
My Tippet – only Tulle –

We paused before a House that seemed
A Swelling of the Ground –
The Roof was scarcely visible –
The Cornice – in the Ground –

Since then – 'tis Centuries – and yet
Feels shorter than the Day
I first surmised the Horses' Heads
Were toward Eternity –“

Emily Dickinson – poet – 1830-1886

 

INDEX

12th October ‘20

16th October ‘20

% Loss/Gain

FTSE

6016

5919

-1.71%

DAX

13086

12908

-1.36%

CAC40

4952

4935

-0.34%

DJIA

28671

28606

-0.23%

S&P 500

3500

3483

-0.48%

NASDAQ

11732

11671

-0.52%

SHANGHAI

3287

3336

+1.49%

HANG SENG

24217

24386

+0.70%

NIKKEI 225

23588

23410

-1.18%

ASX 200

6102

6176

+1.21%

       

Up until the end of last week, with a 11-12% lead in the polls, markets were starting to accept that the Democratic Presidential nominee, Joe Biden, was very likely to be the 46th President of the United States in January at the stately age of 78. The alleged unorthodox behaviour of his 50-year old son, Hunter, has provided some awkward moments for his campaign, but many believe it will take an unprecedented bombshell to erode a lead of that magnitude. It is generally accepted that a Biden administration will initially not be good news for the UK. We can kiss goodbye to any trade deal with the US. Biden will almost certainly turn his attention to rekindling a love affair with the EU, which his predecessor, Barack Obama was obsessive about, starting by coming back to the ‘climate change’ negotiation table. Obama was ‘hell-bent’ in tossing the EU and the UK into the same play pen, which he could toy with at his pleasure. I suspect Biden may also appease China, by undoing some of President Trump’s good work in ironing out trade imbalances with President Xi Jinping. Such is life!

As can be seen from the table above, apart from Asia, equities made very little progress last week. Covid-19’s spike seems to remain both spiteful and rampant and refuses to ‘come back on the bridle’ to the exclusion of China. The political uncertainty that currently prevails in the US coupled with virus issues and the Democrats’ truculent attitude over agreeing a $2 trillion stimulus package before the Presidential election on 3rd November has temporarily dented investors confidence, despite not a bad start to the 3rd quarter earnings season and regardless of marginally disappointing Initial Jobless claims, which saw 898,000 people added to those already drawing benefits. Inflation in the US edged up a pip from 1.3% to 1.4% in September. US retail grew by 1.9% in September, which underscored the underlying strength of the US economy.

In the UK, the unemployment rate rose to 4.5% last month, which in essence meant that since the March lockdown, 1.15 million jobs had been lost and by the end of the year few will be surprised if there are not 3 million on the dole queue. The political row and subsequent angst over the tiered temporary lockdowns around the country are starting to have a seriously damaging effect not only on the economy, but also the welfare of school children, cancer and cardio-vascular patients, mental health and domestic violence sufferers. I have some admiration for Manchester’s Andy Burnham’s defence of his realm, but the law is the law and many like me would be appalled to see the army and the police to take to the streets to quell civil disobedience. This is not a political issue. Covid-19 is the ‘enemy’ - not the PM or any political party.

More money may be required, but this debt has eventually to be paid back by our children and grandchildren. It is interesting to note that the interest paid on UK Government debt (gilts) as a percentage of GDP has fallen quite sharply in recent years down from about 6% to nearer 1%. So, there is a strong case for ‘carry on borrowing!’

The cumuli nimbus clouds that hang over the BREXIT negotiations have also rattled UK investors’ cage. PM Johnson and Lord Frost have served notice that they do not wish to participate in any more talks, whilst the EU remain intransigent over ‘state aid’, fishing rights and other pieces of bureaucracy, They seem pitifully inconsequential issues to bring about a ‘NO deal’ situation at the end of the year. Perhaps brinkmanship is playing a ‘high profile’ role. For the first time for months Chancellor Merkel has popped her head above the parapet, hoping that a deal could be struck. With economic turmoil likely to prevail for many months, if not years to come, it seems idiotic to me that a trade deal between two geographically close and supposedly friendly neighbours cannot be cobbled out. The problem is the EU not Europe! I hasten to add that the UK cannot surrender its sovereignty to the ECJ. That was the main reason for the UK taking its leave.

The Bank of England continues to have talks with the banking sector in terms of preparing for negative interest rates. Most people agree that the effect of negative rates would be catastrophic. It would be goodbye to free banking, nor would they stimulate economic activity. I hope the idea will remain in the ‘toolbox’. On a global basis the IMF warned that this pandemic will leave scars and that the recovery will be long and uneven. The UK did not come out well from the IMF’s recent GDP survey. Its forecast for the UK was -9.8% for 2020 and +5.9% in 2021; The US was -4.9% for 2020 and +3.1% in 2021 with Germany -6% for 2020 and +4.2% in 2021. The EU’s gross GDP came in at -8.3% in 2020 and +5.2% in 2021.

Some people in the UK are not overly despondent about the recovery, especially if a vaccine can be found and utilised in the first quarter of 2021. I was interested to hear some interesting comments and data from the much-respected Chris Watling of Longview Economics. He believes money will be spent on recovery, housing, home improvements and entertainment and travel. He says “Given conservative income and spending assumptions for the rest of the year, we expect households’ stockpile of ‘excess’ savings to rise further, albeit more slowly, to reach around £170 billion by the year end. That, if it happened, would represent ‘spare’ spending firepower in the UK household sector equivalent to 7.7% of 2019 GDP. In that respect, the consumer spending capacity in early 2021 is large and is likely to be released as/when (i) a vaccine becomes available; and (ii) as confidence is underpinned by housing wealth effects. In that respect, as households draw down on their excess savings, there’s potential for the UK savings rate to turn negative in 2021. I was personally amused that shoppers spent £800 million more on wine from supermarkets and off-licences since the lockdown as against the same period last year. Take-home sales were up 31% to £3.44 billion. Business leaders are still up in arms over inadequate financial support over tiered restrictions and local lockdowns. Some 75,000 members of the British Chamber of Commerce have told the PM of their displeasure and the hospitality industry could lose 650,000 jobs by the end of the year with London potentially losing 250,000, according to UK Hospitality’s Kate Nicholls.

US banks dominated the start of the US earnings season. Apart from Wells Fargo, whose efforts did not pass muster, the rest of the main banks – JP Morgan, Citibank, Bank of America had two issues in common. Their provisions for bad debt were substantially down and they gleaned much of their profits from trading fixed interest, equities and from investment banking. Goldman Sachs and Morgan Stanley posted outstanding numbers with the former seeing profits up by 12% in the last quarter to be eclipsed by the latter, whose profits bounced by 25%. Since the beginning of the year the main UK banks have surrendered 50% in share value. Low interest rates, provisions for bad debts and crippling capital and regulatory requirements have blunted progress. UK banks have also been unimaginative since the 2008/9 crisis in terms of diversity such as wealth management. Unbeknown to me, banking has not been a great ‘Arfur Daley’ in the US over the same period. This is how they have performed - Goldman Sachs -10%, JP Morgan -40%, BoA -34%, Citibank -47% and Wells Fargo -75%! Johnson & Johnson and Honeywell were the pick of those who stepped up with their earning last week. The floodgates open in earnest this week.

There was quite a compendium of UK corporate stories last week, mainly dispiriting. Edinburgh Woollen Mills and Peacocks let 600 people go and Pret a Manger eased 400 people out - all part of this horrible hospitality and retail syndrome. JD Wetherspoon posted shocking numbers – sales down 30% on the year and profits down by 95% with a loss of £34 million for the last quarter. Their ebullient CEO Tim Martin was incandescent with rage at Government policy and will be forced to start his redundancy programme soon – shares down 19% on Friday and 67% down year to date. ASOS posted an 19% increase in sales but threw out caution that the unemployment of the young would affect the business going forward – shares down 6% on Thursday. Boots, part of Walgreen, has seen a 29.2% drop in like for like sales and a 16.7% drop in revenues as the Walgreen Group posted a $102 million loss on pharmacy. Boots is making 4000 redundancies and is closing 48 outlets. Gourmet Burger Kitchen has been bought by Boparan Restaurant Group. However, 26 restaurants will be closed, and 362 jobs lost.

Barratt Development posted an upbeat outlook with a cash surplus of £570 million and intentions of building 20,000 houses this coming year. Dame Sharon White, chairman of John Lewis spelt out the retailer’s future in stark terms. Retail has changed forever. Online is the way forward with 60-70% of business likely to be done via the web. Waitrose has increased its online business from 5% to 20%. JLP has ambitions to extend its customer facilities to financial services, garden centres and possibly housing, entering joint ventures with product experts.

Unilever hopes to complete its head office and single LSE quote before too long. However, a Dutch tax claim of €11 billion, may delay CEO Alan Jupe’s plans. It is thought that over 90% support for the change has been achieved from most international shareholders. Rolls Royce has started its £5 billion restructuring by completing a £2 bond sale. This is the worst crisis experienced by the RR since 1970, when the company went into liquidation temporarily. Having completed their audacious £6.8 billion acquisition of ASDA, the Issa brothers need to sort out their tax haven issues and corporate governance problems.

BP’s loss of 57% of its share value since the beginning of the year to 206p a share, is of real concern for two reasons – BP now becomes a possible takeover target and also CEO Bernard Looney’s determination to arrive at ZERO carbon emissions by 2050 is too ambitious. Oil and gas are far from dead and buried.

Finally ‘hats off’ to BAE Systems and their partners, RR, Leonardo of Italy and MBDA of France for attempting to build the ‘Tempest’ fighter, which could create 20,000 jobs and add £25 billion to the UK economy thus stimulating our defence and euro-space industry which employs 120,000 people and contributes £34 billion to exports annually.

UK companies posting interim results this week – Monday – BHP Group, Tuesday – Bellway, Reckitt Benckiser, Wednesday – Centamin, William Hill, C&C Group, Thursday – AJ Bell, Moneysupermarket, Rentokil Initial, Travis Perkins, Unilever, Friday – Barclays, IHG, LSE, Essentra

US Companies posting interim results this week – Monday – Halliburton, Tuesday – WD-40, Albertson, Raytheon, Tenet Healthcare, Lockheed Martin, Procter & Gamble, Comerica, Snap, Netflix, Texas Instruments, Phillip Morris, Wednesday – Abbott Labs, Baker Hughes, Biogen, Whirlpool, Verizon, Thursday – American Airlines, AT&T, BJ Restaurants, Coca-Cola, Valero Energy, Kimberly-Clark, Northrop Grumman, Amazon, Twitter, Friday – American Express, Goodyear

Economic data to be posted this coming week – Monday – US NAHB Housing Index, Tuesday – US Housing Starts & Building Permits, Wednesday - UK Inflation (Core, RPI, CPI & PPI), UK PSBR, US MBA Mortgage Applications, US Beige Book, Thursday – UK BoE Andy Haldane Speech, CBI Optimism & Industrial Trends, US Initial Jobless Claims, US Existing Home Sales, Friday – UK Retail Sales, UK, EU & US IHS Markit PMIS