Is the UK stock market about to turn?Posted on: 16 November 2020 by Peter McGahan
Peter McGahan considers whether post COVID and Brexit we'll see a surge in the economy or a more punishing downturn.
As you know, there is rarely an obvious ‘good time’ to invest in the stock market, yet there is a natural desire to try and spot it.
As my late father told me many years ago, ‘when everyone else starts running, I walk’. That theory makes sense in the investment world for sure, and the opposite is also true: when everyone else stops, it’s a good time to start.
On a daily basis, I will see a headline contradicting one from the day before: the ‘US jobless report is ugly’, followed by the ‘US economy rebounds sharply’.
If you have the time for that, as well as a good physiotherapist for your neck, best of luck.
I would rather eat cardboard.
There is no doubt however, that the much-unloved UK domestic market is returning to become a potential option. When it does, those markets will move quickly, and in the long run, investments in the UK will today look to be a cheaper option.
Hit by the Brexit fiasco, an unloved currency, and a Covid coping strategy surpassed only by the USA in terms of inefficiency, the UK domestic stocks have had a bashing.
One talk of a vaccine and such domestic stocks rebounded with bargain hunters on the periphery sat like Meerkat, nose in the air.
Stock markets tend to look beyond current noise. As the world moves into lockdowns, stock markets bounced. Extraordinary. Maybe they see something else?
Looking at quarter three earnings most have surprised on the upside, both in terms of sales and actual earnings, with only utilities surprising on the downside.
In a worrying market, you might not have expected that.
Consumer discretionary surprised 84.24% on the upside. These are items that are not needed, and only purchased where someone has the excess money to buy them. Consider.
Communications services also surprised nearly 25% on the upside. No surprise communication services have done well, but it is that they have surprised is key.
Looking at daily Covid cases the number is rising but if you ask, more people if they have it (testing), the cases will rise. The overlay on that is daily global deaths, which is pretty flat. Any sign of a green shoot, the optimism surges into the stock. Excess mortality is above average, but nothing like the April spike.
Whilst this space is full of conspiracies and emotion on all ‘sides’, I had a zoom call in the last three days with two relatives and some friends who have Covid. Other than a tickly cough and a positive test, they were unaware of their virus at all.
Most interesting, looking at the factual data, Sweden’s approach of carrying on and protecting the vulnerable is showing clear positive results with excess mortality all but non-existent over the last three months.
If I look at global mobility (i.e. movement of people as tracked by your phones if you leave that function on?) in retail and recreation, as well as groceries and pharmacy the statistics are pretty benign. Spain was down 55% in April and the UK down 33% in groceries/pharmacy. That is now -2% and – 9%. In terms of retails, April’s figures for the UK were -76% but this is -28% on October 30th.
Consider also the UK household savings ratio, which has rocketed during the last year. 1962, 1971, 1999 and 2017 all had close to historical lows in terms of their savings ratio at five. Wait for it. The UK’s savings ratio now sits at 28.1, with families stock piling nuts for the winter (a downturn).
This is a clear sign of a pent up demand that should make its way through to the economy the moment society thinks its anything other than a big bag of frogs.
Right now the UK is unloved domestically by investors and globally by overseas investors, acutely aware that a currency could nosedive as well as an economy, so much so it trades at a large discount to the rest of the world in terms of a blend of three separate valuation methods.
The reverse is true when it turns, with overseas investors looking for a double whammy of an increasing currency added to stock market surge.
Take time out to review how your pension and investments are now allocated.
About Peter McGahan
Peter McGahan is Chief Executive Officer of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
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