Day: 5 June 2020

Olly Russ, fund manager at Liontrust, shares his views in a short article below.

 

Although 2020 will likely prove to be a year to forget for income investors, 2021 should see companies free of restrictions and awash with capital to return to shareholders.

It is said that predictions are difficult, especially about the future, and never more so than now. An epidemic itself is not out of investors’ experience – we have seen SARS and Swine Flu in recent times, for example. Never though have we seen countries deliberately shutter their entire economies in this fashion. What effect this may have had on viral transmission will no doubt be debated for years to come, but the effect on economies has been severe.

Without doubt, the world is looking at the most severe recession in modern times, with all that this entails in terms of destroyed jobs, wealth and businesses. The fiscal damage caused by varying personal and business bailouts will dwarf the global financial crisis. The corporate response to a downturn in demand has to be to lower costs, which unfortunately means unemployment will rise sharply. This reduced personal spending power will have a long-term negative effect. This excess debt is forecast to take the UK and Europe to around 100% debt-to-GDP ratio.

On the more positive side, as the recession itself was to a large degree artificial and self-inflicted, the bounce-back should be relatively swift once restrictions are lifted. Nonetheless, it seems as if it will be the end of 2022 before European economic output once again reaches the level of January 2020.

Unlike the 2008 global financial crisis, this current recession is not the result of a credit crunch. Banks entered this downturn in relatively good shape, having accumulated capital over the last decade, albeit not necessarily due to prudent management but rather under government orders. As a result, and aided by various government guarantee schemes, there should be no shortage of available funding during the recovery phase.

More than ever, investors need to focus on companies with secure balance sheets and the financial robustness to weather the immediate storms and survive into the potentially more profitable and less competitive landscape beyond. Dividend-paying companies are normally at the forefront of this, but the signalling power of dividends is reduced in this crisis.

European dividend season is very heavily focused in the spring, when payouts are made from the previous year’s earnings. Unfortunately, this coincided with peak corona-panic this year. Dividends were cancelled, reduced, postponed or suspended with varying reasons, including ECB or government suasion, the impact of falling earnings or simply prudence on the part of companies’ management teams.

The net effect of all this will be to reduce the dividend-paying ability of Europe temporarily, in common with the UK.

Looking at those income stocks that have so far been able to navigate the crisis relatively well, it is unsurprising that healthcare stocks feature prominently. Whatever happens in the future, it seems health budgets will rise worldwide, and stockpiling of medical equipment and medicines will become more prevalent, as politicians give the stable door a good slam. Swiss company Roche has hit the headlines with its testing kits for coronavirus, which will no doubt see brisk demand for the foreseeable future. It paid its (increased) dividend as usual in March, as did Novartis and hopeful vaccine contender Sanofi in May. All three companies are expected to raise payouts again next year.

By contrast, with the ECB effectively forbidding capital distributions until at least October, banks have been rather frustrated at not being allowed to pay dividends when they regarded themselves as ready, willing and able to do so. For example, ING announced that the 2019 dividend it expected to pay this year has not been added back to capital, showing that it still intends to distribute it when allowed.

 

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Liontrust Key risks and Disclaimers

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. 

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.  

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This information has been accurately reproduced, as received from Liontrust Fund Partners LLP. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

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By Brian Giuliano, Vice President & Portfolio Manager – Brandywine Global

 

Will the recent worldwide fiscal and monetary moves set the stage for an inflationary future?

The global economy has been brought to its knees by COVID-19, with a collapse in demand unlike anything seen since the Great Depression. Economic shutdowns and social distancing policies have led to mass unemployment and the near-term impairment of entire industries. Authorities have responded with an array of public support policies that have led to trillions in deficit spending and massive monetary easing campaigns. While sweeping policy response is probably better considering the scope of the current crisis, it’s fair to wonder about the longer-term implications of these extreme and unconventional measures.
 

An enormous output gap—the difference between actual and potential output—has been created by millions of workers sitting idle at home and the economy running well below capacity. Federal Reserve (Fed) Chair Jerome Powell has warned of an “extended period” of weak economic growth saying that “the path ahead is both highly uncertain and subject to significant downside risk.” The International Labor Organization (ILO) estimates that over 80% of the global workforce lives in countries with mandatory or recommended closures. In the U.S. alone, 36 million Americans are unemployed. Hopefully these shutdowns are short-lived and we can all return to a more “normal” environment sooner rather than later, but significant damage has already been done. Given the nature of the health crisis and the absence of vaccine, it’s entirely possible—if not likely—that the rebound in economic activity will be lackluster. A recent working paper by the National Bureau of Economic Research (NBER) estimates that a devastating 42% of pandemic layoffs could result in permanent job loss.

In response to the uncertainty, consumers have cut spending and increased savings, businesses are slashing prices, and wages are under pressure. Deflationary pressures are all around. The environment today is not entirely dissimilar from the early 1930s, the last time a demand shock of a similar magnitude occurred. Chart 1 shows what happened to the Consumer Price Index (CPI) in the immediate aftermath of the Great Depression (1930-33). The good news is that today, unlike the early 1930s, policymakers seem to understand the gravity of the situation, and are acting to aggressively combat both the fall in real output and intensifying deflationary pressures.

%. As of 3/31/2020

Source: Haver Analytics. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

By almost all metrics, the global fiscal and monetary response to the current crisis has been incredible, both in magnitude as well as the speed at which the policy support has been deployed. In the U.S., deficit spending this year, as a percentage of GDP, will be close to a 100-year high—eclipsed only by deficits incurred at the height of World War II. If we include the expansion of the Fed’s balance sheet alongside the fiscal response, cumulative monetary and fiscal support in the U.S. is likely to be more than 40% of GDP this year, an astounding figure.

Looking around the world, the policy response has been equally potent. In Europe, Germany, Italy, the U.K., and France have announced even larger fiscal response packages than the U.S. Chart 2 below shows the direct and indirect policy support from around the world. Japan, the world’s most indebted country, announced a $1 trillion stimulus package, roughly 20% of GDP, while the Bank of Japan pledged to buy an unlimited amount of bonds to keep borrowing costs low. These actions go a long way toward preventing economic catastrophe, but they come at a longer-term cost.
 

IMF Estimate of the Q220 Fiscal Response to the COVID-19 Pandemic, % of GDP.  As of 4/2020

Source: IMF. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

Debt, put simply, pulls future consumption forward. If a country borrows to buy something today, that money will have to be paid back over time and will not be available for other expenditures. Debt proceeds can be deployed for productive uses, but too much outstanding debt is not good either. The debt being incurred today to prevent an economic collapse is not productive in the long run. Governments are merely filling the economic hole created by shutdowns and widespread unemployment. The real challenge is that the world entered this crisis with a lot of debt and large unfunded liabilities. At the end of 2019, global debt reached an all-time high, exceeding $255 trillion at over 320% of global GDP. Debt today is almost $90 trillion higher than it was at the onset of the Great Financial Crisis. These figures will grow considerably once we add the bill from the COVID-19 stimulus packages. Therefore, U.S. debt as a percentage of GDP may end 2020 at a century-level high—at least.

% of GDP, SA. As of 5/27/2020

Source: Macrobond  Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

Over-indebtedness, as a society, has been a structural headwind to growth. There’s a good chance that the debt being incurred today will only serve to weaken future growth in addition to exacerbating the disinflationary trends that the U.S. and other countries are facing. It’s entirely possible that the global economy will emerge from this crisis in an even lower growth environment than the past decade.

 

As central bankers have become more creative, boundaries continue to be tested. Unconventional monetary policies, such as large-scale quantitative easing (QE) have become commonplace. Even the emerging world has joined the action with at least a dozen central banks s launching QE programs in response to the current crisis. As the lines between fiscal and monetary policy continue to blur, will these actions spark inflationary pressures? In the near term, it’s highly unlikely considering the deflationary malaise that will be with us for some time. Perhaps as the crisis abates, signs of inflation could appear if the money created by central banks makes its way into the real economy. This too, seems unlikely given the longer-term structural headwinds facing the world, including the mountain of debt discussed earlier. The experience from Japan over the past 20 years—and Europe over the past decade—is that bloated central bank balance sheets and unconventional monetary policies alone do not create inflation, nor are they an answer to a low-growth environment.

Perhaps the most concerning by-product of our current situation, and one that would lead to an inflationary outcome, is outright financing of government deficits by central banks—some form of Modern Monetary Theory (MMT). Recently, the Bank of England/ agreed to directly finance the U.K. Treasury for a small amount, over a short period in response to the COVID-19 crisis. While this small action seems harmless, and unlikely to spur inflation, the risk is that once the door is opened, it’s hard to walk back from it. In today’s politically charged environment—and considering how much debt is outstanding—there’s no saying how “creative” politicians might get to finance deficits. What’s easier to sell to constituents: raising taxes and cutting pensions, or having the central bank coordinate policy with the government? Any move to give central banks the power to spend, would be quite negative and inflationary for the country that chooses to walk down this path.
 

The world is amidst a significant deflationary shock and extreme policy measures are warranted to prevent us from falling into the abyss. But there is no free lunch and these extreme measures will come at a longer-term cost to society, especially when you consider the less than ideal starting point for the current crisis: a massive debt overhang, large unfunded liabilities, and bloated central bank balance sheets. Time will tell how great the cost will be.

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MeDirect Disclaimers

This information has been accurately reproduced, as received from Legg Mason Investments (Europe) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.