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24 August 2020

Contrasting Fortunes for UK and US Markets

James Rowbury, Investment Research Coordinator, Redmayne Bentley

Although last week’s global markets showed some volatility, US markets rose moderately. The S&P 500 and the Nasdaq Composite Index hit new highs, driven by tech stocks and an increasing optimism for an economic recovery with hopes for a new stimulus package on the way. However, UK markets lagged with the FTSE 100 down 1.26% as new inflation figures and quarantine measures including European travel restrictions discouraged investors.

UK Markets
Despite the easing of lockdown measures, the UK economy has been thrust back into inflation, recording an increase to 1% in July from 0.6% in June. In addition, a recovery in the ailing oil price and a rise in activity in the recreation and culture industry pushed up UK inflation more than what was expected. Furthermore, with the additional costs of PPE, the prices for private dental care, physiotherapy and haircuts have also contributed to the increase. Although the rise was a surprise to many, the Bank of England forecasts a sharp pullback as the economic picture worsens citing a potential retrenchment to 0.3%.

The UK’s housing market had its busiest month in over ten years in July, according to the property website Rightmove. The site, which normally lists 95% of homes for sale in the UK, states that the traditional summer lag has been replaced with a surge in activity driven by an increase in demand since lockdown. The number of monthly sales in Britain was up 38% from the same time last year and worth more than £37bn in total. Asking prices have also fallen by an average 0.2%, driven by a 2% drop in London, where the number of properties entering the market is up 69% year-on-year. The temporary termination of stamp duty on homes costing up to £500,000 in England, also encouraged further activity. Nevertheless, with the UK’s inflation rising to 1% in July, house prices could still spiral leading many potential buyers to being priced out of buying a property.

Yorkshire-based housebuilder Persimmon has reported results for its first half. Pre-tax profit dropped by 43% to £292.4m from £509.3m last year, due to completions falling 35% year-on-year as a result of the pandemic. Nevertheless, Persimmon’s short-term outlook is robust, as the company expects to deliver 45% of its anticipated new home completions in the second half. Since the start of July, the company’s weekly private sales were up 49% year-on-year, driving its share price up 6.89%. However, with the furlough scheme coming to an end and many risking unemployment, the long-term outlook for the property sector remains highly uncertain.

Meanwhile, in what is a grim judgement call for the retailer, Marks & Spencer (M&S) announced last week that it will cut 7,000 jobs across its stores and management. The pandemic has caused a ‘material shift in trade’, with in-store sales of clothing and home goods significantly below 2019 levels; however, online and home deliveries were strong. The company hopes that most of the cuts will be voluntary and early retirements. With an unclear outlook of post-COVID sales, the retailer must act to keep up with the ongoing changes in the industry. Nevertheless, the pandemic has shown M&S that it could operate “more flexibly and productively”, with staff multi-tasking while moving between food, home, and clothing departments. In the last eight weeks, total sales in the clothing and home sectors plunged 29.9%, while in-store sales tumbled 47.9%. Hopes for the retailer to make a steady recovery may depend on the outcome of its online partnership with Ocado, allowing M&S to keep up with the current consumer shift towards online shopping.

Global Outlook
In global news, talks between Washington and Beijing involving the ‘phase one’ trade agreement have been postponed, undermining market sentiment throughout the week. The US and China signed the deal in January as a partial truce in their longstanding trade war; this forced Beijing to import a further US$200bn in American products over two years, ranging from farm products to cars and machinery. Nevertheless, the signed accord was before the Coronavirus pandemic hit, causing the purchase of these goods to lag. As tensions between the two nations continue to spark and the upcoming US election looms, President Trump is turning up the heat and uncertainties over the deal’s fate, as well as the possibility of a ‘phase two’ agreement, are increasing.

Tech-company Oracle put its cards on the table in the bidding war over the Chinese social media app, TikTok. The firm has held preliminary talks with TikTok’s owner ByteDance and is considering acquiring the app’s operations in the US, Canada, and New Zealand. Until now, Microsoft has been the lead contender in the race, mulling the potential to take the app’s entire global operations. However, ByteDance is hesitant to relinquish any assets beyond the countries other than the handful it outlined. The entrance of Oracle into the race followed President Trump’s statement in which he ordered ByteDance to divest TikTok’s US operations within 90 days for security reasons. The company is now working with investors in order to outbid Microsoft. Since the announcement, Oracle’s share price has gained 3.1%.

Elsewhere, the Japanese economy has shrunk at its fastest rate on record as it fights the Coronavirus pandemic. Between April and June, the country’s gross domestic product (GDP) fell 7.8% from the previous quarter, 27.8% on an annualised basis. Japan is well known for its low-growth environment, and following two consecutive quarters of economic contraction, it fell into a recession. The slump was driven by a significant drop in domestic consumption, which normally accounts for more than half of Japan’s economy. As global trade is hindered by the pandemic, the nation’s exports also saw a sharp decline. Nevertheless, research house Capital Economics expects Japan’s GDP to bounce back in the third quarter, as the rate of new COVID-19 cases slows.

Please note that investments and income arising from them can fall as well as rise in value and you may lose some or all the amount you have invested. Past performance and forecasts are not reliable indicators of future results or performance. Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the companies mentioned.
Contrasting Fortunes for UK and US Markets
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