If I had to guess, I’d suggest that the consumer bounce back this spring in the UK will be better than many analysts expect. My sense is that a) many people are desperate to go out and spend and b) are less worried than before that any resurgence in activity will result in another full lockdown. The bargain is I suspect set. We don’t go on many foreign holidays, the borders stay tight (though not closed), some vaccine passports come in but otherwise, we’ll be 80% free. Whether that will push back into another lockdown late summer is anyone’s guess, but I suspect that this time – it would be the fourth – the government will have a heck of a time forcing a full lockdown on people.
Anyway, back in the near present, it’s worth keeping an eye on speed data coming in thick and fast from the big investment banks. Quick off the mark is the equities team at Barclays. I’d highlight the following observations on spending trends….
“….. total spending levels continue to accelerate through March (see below), driven by home improvement/furnishing, food, transport, and hospitality, while both online and offline spending levels have increased. Cards data from the BoE/ONS (CHAPS) has also been on an upward trend since the start of the third lockdown, albeit improvement has slowed in March…Spending and mobility continued to improve at the end of March, as activity increased even before more meaningful reopenings. While cases could increase, with just under 60% of adults now having had a first dose of a vaccine, we see low risks of a surge in hospitalizations following today’s loosening of restrictions.”
Figure 6. Spend Trends levels: total, offline and online (28D and 7D averages), Feb 20 = 100
What we definitely do not want to happen is to rejoin Italy in its lockdown. Or France for that matter. My guess would be that the BoJo is playing safe by saying he expects another resurgence to wash up from the continent – we might see an uptick but I’d guess it will be much more subdued.
But even if there is another lockdown, that doesn’t necessarily mean that investors will panic and run for the hills again. Take Italy as an example. It sounds bad there but investors don’t seem to care. They are doing that legendary ‘looking through’ exercise i.e looking through the short-term bad news to see the shiny Umbrian hills resplendent with extra EU cash. Cue the chart below which shows the STOXX 600 ex UK and the FTSE MIB indices. Its from the weekly note by Tricio Investments chief strategist Gerry Celaya. He observes that the local index, the MIB is still below 2020 highs though the German DAX is setting new all-time highs. “Those looking for European shares to head higher at some stage may move down the curve from German to Italian shares which may finally break out of the range in place since 2008 and catch up a bit,” says Gerry.
A more nuanced global snapshot comes from Tim Edwards, Managing Director, Index Investment Strategy at S&P Dow Jones Indices which has just released their March monthly dashboards for US and Europe. According to Edwards, leading the charge in March was “the Netherlands, Canada, Hong Kong and Norway all finished with a 10% total return, but the smaller Chilean market took the top spot overall with 16% – very much bucking the trend in Latin American equities, which otherwise largely finished Q1 with declines. Among the other laggards, Turkey had a terrible quarter, losing 14%, while New Zealand came last among S&P Developed BMI nations with its 9% decline. “.
So maybe those “see-through investors” aren’t seeing through to much joy for the (safe) Kiwis?
Let’s finish our canter through the global markets with the snapshot below from emerging markets equity analysts at Renaissance Capital. They report that up until mid-February, tech-heavy China and Taiwan (as well as – Naspers heavy – South Africa) were outperforming. “Since then, a combination of oil/commodity exporters and those with either pegged currencies or relatively low macro risk (Saudi Arabia, Chile, Kuwait, Russia, UAE) or strong trade links to the US (Mexico) has been outperforming. Of these, Russia has outperformed in the EM sell off (and YtD) despite sanctions fears.”
Figure 6: MSCI EM country performance ($)
Overall though, emerging markets have underperformed so far and my big tactical bet on EM equities is looking a bad idea. And if we are honest there’s plenty that could still go wrong. The Renaissance analysts nicely sum up the EM bear case thus : “ For the EM bears, this is a replay of the 2013 taper tantrum, where bond yields rose from 1.6% in early-May to 2.0% by 22 May when then Fed chairman Ben Bernanke hinted at a quicker than expected winding down of QE before peaking at 3.0% (and EM equities suffered a 17% peak-to-trough decline) before the Fed reversed track, cancelling the taper at its September meeting. This time, the Fed is not yet trying to normalise policy, but with the S&P breaking new highs, and US economic surprises still positive the Fed may still be some way away from feeling the need to take any action (verbal or otherwise) to stem a further rise in yields. For EM equities, this suggests more pain before a recovery.”
I think that bearishness is overdone and I would wager that a select bunch of countries will outperform via their commodity exposure – Russia, South Africa, Saudi Arabia, Chile – from direct trade exposure to the US (Mexico). In sector terms, I’d echo the Renaissance thought that we’ll see a “global rotation trade to growth sensitives (commodities, financials and real estate) over the growth-in-a-no-growth world sectors of 2020 (IT, consumer discretionary, communication services and healthcare). And some caution on countries with high external funding requirements / where higher bond yields are having an outsized impact on local yields (Turkey, Brazil, Colombia vs China, India, Korea and the GCC).”