Living with COVID- settling into an interim ‘new normal’

Compared to the rest of 2020, July proved almost uneventful as global capital markets consolidated strong gains made during the previous quarter, with only emerging market equities and gold delivering notable advancements (see returns table further below). At the other end of the scale, poor returns from Japanese and UK equities confirms the trend of investors preferring long-term growth prospects of the ‘new economy’, versus short term earnings stability or recovery potential (value) of the ‘old economy’. This has much to do with the fact that the yield investors could safely earn– until this long-term growth materialises – is so close to 0% that they much less mind waiting than usual – and not much with concerns over diminishing recovery potential of value investments.


Unemployment – a tricky economic variable

At the Bank of England’s (BoE) latest meeting last week, a more optimistic than expected short-term outlook for Britain’s economy emerged. One of the most notable forecasts was its call on employment. While furlough and other emergency government measures have allowed many to keep their jobs and paycheques, some fear these policies are just papering over gaping holes in the labour market, and that when they change or expire the number of jobless Britons will rise sharply.

The BoE’s Monetary Policy Committee (MPC) agrees with this general diagnosis but is substantially less pessimistic about how bad things will get. The chart below shows their employment outlook against that of the government’s fiscal watchdog, the Office for Budget Responsibility (OBR). MPC members now expect unemployment to peak at 7.5% by the end of the year, a milder bout of joblessness than after the global financial crisis. The OBR, by contrast, expects unemployment to peak around or above the previous all-time high back in the early 1980s.


Property funds not such hot property

Property can be an attractive investment. Like everything else, property prices have their ups and downs, but investing in ‘real’ assets can appear to hit a sweet spot, relative to financial assets like equities, bonds or cash. There is enough of a positive yield that holding it is preferable to holding cash, and not so much price volatility that investors get skittish.

The main problem, as anyone who has tried to buy or sell a house could testify, is that property is hard to sell – or at least hard to sell quickly. Money tied up in physical property can take months to turn into usable capital, which can be off-putting for investors – particularly those requiring flexibility in their portfolio.


Read the full commentary here