The global economy shows resilience to COVID-19 headwinds | November 2020



In this episode we'll be discussing recent GDP and retail sales data and what this suggests about the economic recovery.

Global equities have largely recovered their losses in the wake of the pandemic sell-off in March, with fiscal and monetary stimulus helping support private consumption across the globe. Retail sales and residential housing have both seen strength in recent months.
Can this last?

[0.28] In spite of a recent wobble, global equities have been reasonably resilient and economic figures appear to be improving. Can you give us the big picture as we go into the final months of the year?

  • Global equities have recovered their losses from the pandemic sell-off in March and including dividends reinvested are broadly flat year-to-date1
  • stock prices have undoubtedly been helped by unprecedented fiscal and monetary stimulus to boost market liquidity and stimulate the global economy which, along with the lifting of lockdowns, has led to a rebound in private consumption globally
  • in the USA, September underlying retail sales rose 9.1% from a year ago, the fastest growth rate on record from data that starts in 1992
  • elsewhere, UK retail sales were 7% higher than they were in February3
  • one area where policy has particularly boosted growth is in the residential sector
  • US existing home sales are running at their highest rate since the boom of the mid-2000s and in the UK, lower stamp duty has triggered a rush of housing activity, with mortgage approvals (a lead indicator of sales) running at their fastest pace since 20074
  • there are some areas, however, such as hospitality and travel, where expenditure has been slow to recover
  • the International Air Transport Association does not expect global air passenger traffic to return to pre-COVID-19 levels until 20245
  • nevertheless, equities appear to be ignoring the growth impact on the economy; from the recent spike in new COVID-19 cases and are looking through to 2021 in a more positive frame of mind.

[2.16] There has been some volatility more recently – do you think that UK equities can be resilient in the face of renewed lockdowns?

Yes, for 4 reasons:

  1. First: it is not a whole national UK lockdown. It does not include construction, manufacturing, education. Better prepared for online deliveries. Time-limited lockdown, according to BJ.
  2. Second: is the level of support provided by the Bank of England. The BOE launched £300bn in quantitative easing during the pandemic. Another £100bn could be launched this week to add support for market liquidity.
  3. Third: global economic cycle is recovering. Global manufacturing PMI above boom bust threshold of 50, The Copper prices is up 45% from its low on the 23rd March11.
  4. Fourth: negative news already reflected in cheap UK stocks vs world. Taking into account earnings, dividends and book value, UK equities trade at 55% of the valuation of the rest of the world, the biggest discount since the late 1980s, that should limit equity downside12.

[3.55] What is your view on the outlook for consumer spending? Can it save the day?

  • In our July Investment Outlook [link to:], we argued that this business cycle could be extended beyond an initial rebound as the economy reopened
  • our optimism was partially driven by consumers having the financial wherewithal to sustain spending
  • a way to measure this consumer spending power is to look at the drivers of the household savings rate (a measure of unspent monthly income as a share of take-home pay)
  • in the UK, the household savings rate rose to a record 28% in the second quarter, against a 60-year average of 9%, helped by government fiscal handouts6
  • while it could be argued that the worry caused by the pandemic lifted voluntary precautionary savings, it can also be argued that in fact much of the rise in savings was involuntary
  • in other words, consumers may have been unable to spend; for example, when non-essential stores were shut and holidaymakers were unable to travel (or deterred due to quarantine rules);
  • looking forward, we believe there is room for these savings to now be used to sustain consumption.

[5.15] Do you see any risks to this outlook?

  • Certainly, households in the US (and other major economies) could use up their savings too quickly, a point recently made by Fed Chair Powell
  • that said, US household balance sheets are in a relatively healthy state
  • in the second quarter, US household liquid assets (including deposits, mutual fund and equity holdings) were 3.1 times bigger than total liabilities (mainly mortgages), roughly double the ratio post the 2008 Global Financial Crisis
  • households could potentially use these assets to finance consumer expenditure through this bumpy period.

[5.59] Are you worried about unemployment rising, particularly as we see new lockdowns across Europe?

  • A sharp acceleration in unemployment could discourage households from spending their savings
  • the UK’s coronavirus Job Retention Scheme (national furlough scheme), which paid 80% of furloughed employee wages at its maximum, was due to expire at the end of October, but it is now being extended into December during the lockdown
  • a research house, Capital Economics (CE), estimates that pandemic-related fiscal support will fall to around 5% of GDP in March 2021 from a peak of 20% last May7
  • with less financial support coming from the government, the risk is that redundancies rise, and consumption growth slows
  • the recent rise in new COVID-19 cases across Europe, and the resulting local lockdowns in Spain, France and the UK could undermine consumer confidence, the growth outlook and the ability to spend; and
  • nevertheless, the Eurozone service Purchasing Managers Index (a surveyed proxy of consumption) has dipped only slightly to 46 in October, below the boom/bust threshold of 50, but remains substantially higher than a record low of 12 in April8.

[7.19] How does this compare to the Global Financial crisis in 2008?

  • Unlike the Global Financial Crisis in 2008 when policy stimulus was largely directed to shore up the balance sheets of the banks (i.e. Wall Street), more money has been directed towards consumers (i.e. Main Street), as evidenced in raised savings rates.
  • moreover, the latest data shows that US real median incomes are growing by around 1% a year, compared to deep contractions in the previous 3 recessions of -4.4% (2008), -2.1% (2000-01) and -4.5% (1990)9
  • this data suggests the government handouts have worked to ensure the stimulus has been more equitable, thus increasing the likelihood that consumer pent-up demand will be supported by both savings and incomes
  • certainly, the fundamental backdrop for company earnings has improved
  • current consensus one year forward global Earnings Per Share annual growth rose to a decade-high of 20%, up from a low of -2% in May;
  • given this favourable environment, we remain constructive on equities despite the obvious risks.



1-4, 6, 9, 10-12 Refinitiv Datastream, data as at 26 October 2020

5 International Air Transport Association, data as at 28 July 2020

7 Capital Economics, data as at 20 October 2020

8 Bloomberg, data as at 23 October 2020



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This episode was recorded on  02/11/2020

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Investment Show: The global economy shows resilience to COVID-19 headwinds

Episode 15

Broadcast on Smith & Williamson at 09:00, 9th of November 2020

Available online from 10:00 on the same day .

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