Yesterday was a quiet day for economic data and news, which saw the majority of markets draw breath closing the day marginally lower, driven primarily by a tough set of Q2 results for many companies. That being said, these results were largely anticipated given the coronavirus curveball that the markets have been pitched this year!
European markets were arguably dealt a boost by the European Central Bank (ECB) yesterday as they further pressured the banks to refrain from paying bonuses and dividends to their shareholders. While this was not reflected well in banking stocks, the ECB chose to further embed the stance it took in March to ensure liquidity in the system remained. This stance was effectively a trade-off with lenders to ensure the unprecedented relief afforded to them was working its way through to the economy in order to stimulate lending, spending, inflation and wages. The Bank of England took a similar stance to the ECB by announcing that it will reassess the UK’s bank dividend payout, and buyback restrictions, at the end of the year (2020). Again, while this will likely upset shareholders, it is a broader liquidity boon for the economy.
As we have mentioned previously, there will be some hurdles that markets will have to deal with on the path to recovery in the wake of the pandemic, with the most clear and obvious of these being the Q2 earnings season. With this week being one of the busiest in terms of companies reporting, and with many of the companies accounting for lockdown and lower demand in their Q2 numbers, the coming weeks will likely see increased volatility over the short term as markets seek to look through this short term noise.
Yesterday we saw a number of companies report. Fast food chains Greggs and McDonalds, whilst both clearly struggled through the lockdown period, the fast food industry as a whole has been one of the quicker business models to adapt in the wake of lockdown. Whilst Greggs reported a pre-tax loss of £65.2million for H1, a recent pickup in sales trends is extremely encouraging. Likewise, whilst McDonalds posted a drop in comparable sales of 23.9% for Q2, missing expectations, the chain saw a consistent improvement in sales through Q2 with nearly all of their restaurants around the world now open to serve customers. Both however stated that any recovery will be hindered whilst social distancing is playing a role. We also saw companies such as Reckitt Benckiser (a leader in consumer health and home products) report. Clearly this segment had performed well through the lockdown period with coronavirus introducing a new ‘take’ on hygiene for the masses, seeing Reckitt’s beat analyst estimates, posting Q2 net revenues of £3.37billion with Q2 like-for-like sales up 10.5%.
It must be remembered that well run corporates with strong and robust business models, whilst perhaps in many sectors have struggled over the past few months, will go from strength to strength as economies claw back a resemblance of normality as lockdown measures are safely wound down. It is for this very reason, coupled with our belief that the coronavirus is a transient issue for markets, we believe in a ‘V-shaped’ (or increasingly a ‘Nike Swoosh’ shaped) recovery. It is also why a robust and consistent investment approach is key in identifying investment opportunities that not only have compressed valuations, but also have a strong and positive outlook on a risk adjusted basis. We now look ahead to the US Federal Reserve’s policy announcements later today.
Jonathan Wiseman, Fund Manager