HAMISH MCRAE: Why shares WON’T follow as economy takes a fall

Has all the bad news been priced into the stock markets? Not only are UK assets deeply unfashionable at the moment compared with those of other countries, but there is the wider concern that the world economy will have a second plunge in the autumn when the present support measures fade away.

Explaining why the UK is unfashionable is easy. There is a blast of negative publicity about the Government’s handling of the coronavirus crisis in the foreign media and much of the domestic media too.

The FTSE 100 index is skewed toward sectors that are struggling, including banks and oil companies, so it has lagged other markets. There are the stories about the likely failure of the trade negotiations with the EU. And, crucially, there are a string of announcements of job losses to come, the latest being from Dyson. Even successful companies are shedding labour.

So there is a jobs time-bomb. Unemployment lags the economy and is bound to rise in the autumn and winter. We don’t know by how much; we do know that jobs are being artificially supported and that this cannot go on much longer.

But investors know all this too. They also know that there is a danger of a second wave of the virus, just as they can see the tsunami of money pumped into the markets by the central banks that has to go somewhere. All this is, in the jargon, ‘in the markets’.

As far as UK assets are concerned – and to a lesser extent global assets too – the surprises are more likely to come on the upside than the down.

Where are these surprises? Well, think nine months ahead to next spring. We will have clarity on the UK’s trading relationship with Europe. At the moment the markets are assuming no deal, so even a minimal agreement would be a plus.

Actually, given the way the EU works there will probably be some sort of 11th-hour accord, just as there was last weekend over the coronavirus support programme. But even if there isn’t, UK-EU trade will have settled down.

Next, there will be a new President in America. Because the commentators were so wrong last time, they are loath to voice the obvious now, but I think we can assume a Biden presidency.

There will be clarity of policy, which will help asset prices in general and end the ‘flight to safety’ that has worked against the UK. We will no longer be perceived as a risky bet.

Third, it is overwhelmingly probable that there will be a vaccine, and certain that treatments for Covid-19 will be much more effective. There may even be a vaccine in the autumn if the Oxford AstraZeneca one lives up to its promise.

But even if the virus were to return in some other form, at least we will know what we are dealing with. Governments and public health officials will no longer be flying blind.

Finally, the world economy will be growing strongly. It may be that we won’t be able to recover all the ground lost in 2020 by the end of 2021, and some industries such as the airlines will still be struggling. 

But there will be growth, and for the winners from all this, hugely profitable growth. Amazon last year spent $36billion on R&D, more than any other company in the world. Winners have the resources to invest to stay winners.

Translate all this into the likely movement of equity prices and what do we have? Those of us who, like myself, are optimists by temperament have to aim off a bit. But two points seem clear.

One is that at some stage the UK will stop being unfashionable. The discount on UK assets will disappear, and sterling will recover to its long-term normal levels. The question is not whether, but when.

The other is that in a world where bonds have negative yields, investment in equities must make sense. Dividends in the UK have this year been savaged, with the payout on the FTSE 100 cut from £100billion last year to £55-60billion this. But dividends will clamber up a bit next year, and with ten-year gilts yielding a mere 0.15 per cent on Friday – well, anything is better than that.