European Council unveils recovery package

A busy week of news & investment developments, so take a read or listen to the latest podcast from the investment team at Architas. We hope you will find very useful…

In brief

* Europe outperformed this week fairly strongly versus the other global peers such as the US since the bottom of the coronavirus. The critical thing last week was the European Council unveiled a €750 billion recovery package.

* Although the FTSE 100 Index was still positive last week, it did lag other markets. The dominant sectors, banks and oil companies that make up a large portion of the FTSE 100 index, have had specific problems.

* We are close to a Brexit agreement deadline on 30 June, a timeline that was built into the political declaration as an aspiration to reach an outline agreement. Will the UK ask for another extension?
Archinomics

Our view

Europe and Japan performed very strongly last week.

Yes, Europe outperformed this week fairly strongly versus the other global peers such as the US since the bottom of the coronavirus. The key thing last week was the European Council unveiled a €750 billion recovery package. Importantly, twothirds will be distributed as grants to companies and countries to support their recovery, with a third in the form of loans. The key countries that are going to benefit from this are going to be those peripherals such as Spain and Italy that have been hardest hit. Additionally, the data that we’ve seen from Europe and Japan is becoming slightly more in line with expectations. Although still profoundly negative, expectations for both regions have improved.

In contrast, the UK’s FTSE 100 index performed relatively weakly.

Yes although the FTSE 100 Index was still positive last week, it did lag other markets. The dominant sectors in the FTSE 100 have had specific issues. The oil price is weak; banks aren’t allowed to pay a dividend this year and are suffering from low interest rates. And then we have the issue of Brexit hanging over domestic cyclical sectors although travel and leisure companies did perform well last week.

What’s happening with Brexit?

Not a lot really. The negotiations have still been going on by video conference, but obviously, economies have their own issues to address at the moment. Sterling is already coming under pressure, particularly as the UK is slow to come out of lockdown, but also as we come close to that Brexit decision date on 30 June. This deadline was built into the political declaration as an aspiration, but the European Union has insisted that there must be an outline agreement in place before a broader free trade deal can be secured. Will the UK ask for another extension?

And finally, markets have been performing strongly, but economies have been quite weak. Why are markets and economies performing so differently?

So the market is essentially a discount mechanism for future beliefs. And the market is forward-looking, so what we often see is the market‘s expectations of what the economy will look like in three months. The expectation is that the kind of recession that we’re likely to see, given that it’s a one-off event, rather than lending or liquidity problems, is that there’s expected to be a fairly big bounce back from markets. Alongside that, the stimulus that was announced is huge. And that has had a very positive impact on markets.

We also see some optimism over drug development for coronavirus. We need to remember that markets did fall very, very sharply at the beginning of all of this. Business surveys, that record sentiment, are also suggesting that businesses are feeling that the worst is over.

What is next for investors?

* Stock markets have started to focus on issues outside of the global pandemic with Brexit back on the agenda.

* While things look challenging, signs that the coronavirus outbreak may be stabilising have provided markets with a degree of optimism and have boosted business sentiment.

* In the meantime patience and a long term view might be needed while waiting for a revival of economic activity and asset prices.

Listen to the latest podcast HERE

* Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire and the surrounding area, but not limited to the region.