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22 February 2021

Coronavirus Recovery Plan Hits US Economy

The unexpected rise in US jobless claims last week reiterated investors’ concerns over a weak recovery in the US labour market, with Joe Biden’s promise that the US$1.9tn stimulus package will bring the US economy roaring back clearly not enough to ease unsettlement. The US Department of Labor reported that initial claims for state unemployment benefits came in at 861,000 last week, well above the consensus expectations of 773,000. The figures were unexpected at this level, yet not completely surprising, as jobs data has continued to be the laggard in an otherwise stronger-than-expected start to the year for the US.

Although a small piece in a much larger puzzle, the disappointing economic data seemed to catalyse a decline across US markets last Thursday morning. Markets slightly recovered afterwards, with the S&P 500 finishing 0.44% down at close of business in Thursday, and the Nasdaq 1.63% down for the week. After strong performances throughout February, it is important to note that the fall puts the S&P 500 only 1% away from a new all-time-high set on Tuesday 17th February, while the Nasdaq was below 3%.

On the other side of the world, the CSI 300 Index, which measures the performance of the top 300 stocks traded on the Shenzhen and Shanghai stock exchanges, reached new highs, further stoking the economic rivalry between the US and China. The CSI 300 posted its highest record of 5,931 points by Thursday’s end, significantly beating the previous peak of 5,885 points set in 2007 and surpassing the highs seen in the stock market bubble of 2015. Despite the Index rising almost 10% in 2021, valuations in Chinese equities are modest compared to those in the US. The CSI 300 was trading at 22 times the previous 12 months’ earnings, against 32 times for the S&P 500. The unstretched valuations offer practical growth prospects, especially for investors looking to gain exposure to the global leader of exports’ rapidly developing economy.

In the UK, inflation rose to 0.7% in the 12 months to January. Experts warned that inflation could rise above the Bank of England’s target of 2% before the end of 2021, and the prediction appeared to have had a knock-on effect to the FTSE 100, which was down 1.40% for the week at the time of writing on Thursday night. Hargreaves Lansdown suffered one of the steepest declines in the FTSE as the shares fell 6.8% after investors speculated on co-founder Peter Hargreaves sale of around £300m of his stake in the company. The co-founder also sold a £580m share last year which he stated was to ‘diversify my assets’. Another UK company posting an unsatisfactory performance was British American Tobacco, down 4.9%, which was largely due to a profit warning of single digit growth this year. The increasing ethical focus weighing on the mind of investors poses a threat to the industry in the long-term and could explain the 17% drop over the last year. However, the consistent dividend and defensive qualities of the company still attract some investors and could offer grounds for an improvement in the share price.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Coronavirus Recovery Plan Hits US Economy
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