US
In the US, all 50 states have declared emergencies with governments at the local, state and federal level taking action to ease the financial burden on Americans. Trump’s administration and Congress agreed on a $2 trillion stimulus package, which includes income support of $1,200 per adult and $500 per child and starts phasing out for individuals who earn $75,000 per annum or $150,000 for couples. Loans worth $367 billion have been offered to small businesses struggling with the immediate drop in revenue due to the pandemic. The government will not expect the businesses to pay the money back if they manage to retain most of their employees over the next six months.
In the form of loans, loan guarantees and purchases of companies’ corporate debt, the legislation provides a total of $454 billion which will help large and medium-sized business access capital during the crisis. $58 billion have been set aside to help American airlines through loans and grants and $17 billion will be provided to help companies that are critical to maintaining national security.
UK
In March, UK Chancellor Rishi Sunak announced a £350 billion emergency package for the economy[1] which consists of state loan guarantees worth £330 billion along with a further £20 billion of handouts for struggling businesses. He also promised £12 billion in emergency support in the budget, a one-year abolition of property taxes for all companies in affected sectors and suspended business rates for many firms.
The Chancellor also added a generous £9 billion scheme to support up to 3.8 million self-employed workers hit by the impact of the pandemic. 95% of the country’s self-employed people are able to access a grant of 80% of their recent average profit (capped at £2,500).
The government also announced a job retention scheme which offers compensation in full for employment costs of up to 80% of salary bills for workers that companies can’t provide work for, but are kept on payroll.
Germany
The German finance and economic ministers have vowed to make unlimited financing available to individuals and businesses as part of the country’s efforts to immunise Europe’s largest economy from the COVID-19 impact. The government promised that there will be no upper limit on the aid that will be offered to companies that are affected by the crisis.
The government has set aside a “supplementary” €156 billion budget for 2020[2], which includes a €50 billion plan to provide direct grants to small businesses and self-employed people who can’t access bank credit. Businesses with up to five employees are eligible for a one-off grant of €9,000 for three months, whilst those with up to ten employees will receive €15,000.
The government has also set up a €500 billion bailout fund to recapitalise big companies with more than 250 employees that face struggles due to the crisis. Landlords are also not allowed to evict tenants who fail to pay their rent due to the pandemic.
The country’s also expanding its programme of export credits and other additional guarantees to help struggling companies and has committed to deterring “billions of euros” in tax payments. Germany is also compensating individuals who are sent home by their employers due to the lack of work for them. The government anticipates that the scheme will cost the Federal Labour Office €10.05 billion.
France
Like many of his colleagues from across the globe, French President Emmanuel Macron has guaranteed that the French Government will offer unlimited support for individuals and companies that have been affected by the global pandemic, which will cost the country €45 billion. He’s also committed to offering grants to workers who have found themselves in unemployment due to the pandemic crisis. France’s Minister of the Economy and Finance has also promised €300 billion of French state guarantees for bank loans to companies, as well as €1 trillion of such guarantees from European institutions.
The government has also suggested the possible rescue of companies such as Air France, which have state shareholdings, and has deferred company tax and social security payments. It’s also offered sick leave payments to parents who have to stay at home to take care of their children due to school closures.
Economists have warned that the damage from the coronavirus crisis could be similar to that from the 2008 recession.
Italy
Italy has begun distributing funds from the fiscal rescue package, totalling up to €25 billion, promising that “nobody will be left alone”. €1.15 billion of this has been distributed to their health system and €1.5 billion has been offered to the civil protection agency, which has been working on Italy’s coronavirus response.
Additionally, self-employed people have been promised one-off payments of €500 per person, companies that pay redundancy payments to their employees have been offered support, there’s been a freeze on any worker lay-offs, and people who are still working during this time have been offered bonuses.
Businesses hit by the pandemic have been promised loan guarantees and a moratorium on loan and mortgage payments is expected to be put in place. Financial support will be offered to families with children, as well as taxi drivers and postal workers who have to continue working during lockdown. The government also announced plans to financially support Italian airline Alitalia.
Spain
Spanish Prime Minister Pedro Sánchez has described the government’s coronavirus rescue package as the “biggest mobilisation of resources in Spain’s democratic history”. It includes €100 billion of state loan guarantees for companies aimed at ensuring liquidity, specifically for small and medium-sized companies. The whole package will amount to €200 billion.
Mr Sánchez has also announced a moratorium on mortgage payments for people who have been hit hard by the pandemic and a similar moratorium for utility bills. He’s also suspended some social security payments and has set aside €600 million to help people who depend on social services.
[1] https://news.sky.com/story/coronavirus-330bn-of-government-backed-loans-for-businesses-11959156
[2] https://www.ft.com/content/26af5520-6793-11ea-800d-da70cff6e4d3
The fact of the matter is, real estate has been performing even worse than the S&P, which is highly unusual, considering that historically REITs have always offered better downside protection than other equities.
Why is that happening?
Following the quarantine measures imposed due to the COVID-19 pandemic, a lot of businesses have to temporarily cease operations. Almost every company, from corporations to small businesses, is or will be impacted. This sudden slump in economic activity is incredibly dangerous; the cash flow chain is disrupted, leaving companies with no cash to cover employee salaries, mortgage payments, and rent payments. Naturally, when businesses start defaulting, a liquidity crisis is to be expected. For example, if tenants start postponing rent payments, it’s the REIT companies that bear the losses.
Considering that most REITs are using leverage, that poses a threat to the banks too. The difference from 2008 to now is that a much bigger part of the US real estate market is financed by small mortgage originators that operate as REITs, which originates from the aftermath of the last crisis and the strict regulations imposed on big banks.
Pricing in those risks, investors have punished the real estate sector harshly. But are they right in doing so?
Data shows that real estate companies have learned their lesson from the 2008 crisis. Following years of strong performance, REITs have reduced their debt levels substantially and now their balance sheets look healthier than ever; they are certainly in a position to weather the storm.
According to data from NAREIT, REITs are currently sitting on $28 billion of cash and $120 billion of untapped credit lines. The weighted average ratio of cash and credit lines to interest expense is 10, meaning that currently, REITs hold 10 times the amount in cash and available credit to cover their interest payments. On top of that, managers are starting to show increasing confidence by buying up their companies’ stock. Herbert Simon (Chairman, Simon Property Group $SPG) bought a total of 188,572 shares, or the equivalent of $9.9 million and Peter Carlino (CEO, Gaming and Leisure Properties $GLPI) purchased 80,000 shares for the price of $2 million. Arbor Realty Trust $ABR announced a $100 million share buyback program, which at the current market cap represents 10% of the total float.
So why has every other REIT dropped by 50–60% in the past few weeks then, when rationally, this shouldn’t be the case? The COVID-19 crisis is real and it shouldn’t be underestimated. The danger for people’s health and the danger for the economy is significant. However, we shouldn’t suddenly forget how to value solid fundamentals. Real estate companies derive their revenue from long-term leases, and that’s how rational investors should value REIT companies — based on their potential for future cash flow generation. And by future, we mean years - not a few months. There’s a high chance that real estate prices will drop and many companies will release disappointing results for 2020, but that shouldn’t have a huge impact on their valuation, considering the long-term nature of their assets. Regardless of the struggles we may experience in the next few quarters, the demand for housing won’t suddenly disappear. The demand for hospitals is certainly here to stay. The demand for offices, industrial buildings, hotels and experiential properties has only been increasing over the past decades, and to think that this demand will disappear means that we believe that this recession will last for decades — which when we look at the past is highly unlikely.
In this market of panic and scary headlines, it’s more important than ever to look at the facts and ignore the noise. We are undoubtedly faced with risks and uncertainty connected to COVID-19, however, the panic in the commercial real estate market is overblown. Currently, due to its solid fundamentals and a high possibility for recovery, this stands as one of the safest sectors. As the Persian saying goes “This too shall pass”, and the chance that the prices we’re seeing now will look like a steal in a few years is too high.
Nigel Green, Founder and CEO of deVere Group, has warned that coronavirus, paired with the heightening geopolitical and trade tensions, could drive the world to the brink of a global recession this year. He said: “Investors have largely been caught off-guard by the serious and far-reaching economic consequence of the coronavirus. This, despite major multinational organisations already lowering their profit guidances, and many more likely to do so in coming weeks. Clearly, this will hit global supply chains, economies across the world and ultimately government coffers too.
“However, it does seem that the world is waking up to the reality of the situation as the containment of coronavirus hasn’t yet materialised and confirmed cases soar in different countries. Until such time as governments pump liquidity into the markets and coronavirus cases peak, markets will be jittery triggering sell-offs”, Mr Green notes.
Investors around the world must take action if they want to safeguard their wealth in the current volatile environment and they must take precaution about the stocks they want to put their money in as the coronavirus outbreak is disrupting the supply chains of many companies.
Here is Finance Monthly’s list of the top 5 stocks that are likely to weather the storm, which will hopefully help you with handling your portfolio in light of the coronavirus news.
McDonald’s
You can find McDonald’s signature golden arches in over 100 countries across five continents. It is one of the biggest and most recognisable fast-food chains in the world. Thanks to its unique franchising structure and low prices, McDonald’s is one of these companies that will thrive in any economic condition.
With over four decades of consecutive annual dividend increases, McDonald's is a Dividend Aristocrat[1] - it has issued dividends every year since 1976. In the last few years, it has repurchased the shares at a meaningful rate which has boosted the earnings per share and has supported the stock price.
Although the fast-food chain had to temporarily shut over 300 restaurants in China in January (which is only about 1% of its China stores), due to fears about the coronavirus outbreak, China accounts for only 2% of McDonald’s earnings. McDonald’s stock has doubled since 2015 and has shown no signs of slowing down, even with the coronavirus out there.
Facebook is one of the best and most safe stocks to buy on coronavirus fears. Although shares have taken a hit, investors should remain focused on the long term, valuing stocks based on fundamentals.
Facebook is one of the few companies that have no exposure in China, where the outbreak is the worst, as the social media platform is blocked there. On top of this, there are no signs that minimal outbreak in other countries has resulted in weaker digital ad spending, however, investors should keep an eye out for any commentary from Facebook’s management on whether or not the virus is having a material impact on the social network.
When taking the current low-interest-rate environment, it is also worth noting that Facebook is a growth stock, and growth stocks tend to perform very well in low-interest-rate environments.
The stock was also cheap before the coronavirus selloff, so all in all, FB stock could provide investors with a high-quality, big-growth company with minimal coronavirus exposure.
According to Jeremy Bowman:[2] “Facebook is also highly profitable and sitting on $54 billion in cash and equivalents, giving the company plenty of resilience against an extended disruption. The stock is trading at a P/E ratio of 21 based on adjusted earnings and backing out its cash sum. Considering its growth rate, the stock already looks like a bargain. If shares keep falling, it will be a downright steal.”
Even people who haven’t been affected by the coronavirus are becoming more and more health-conscious, trying to take precautionary measures through buying products like hand-wash, wipes, sanitisers, disinfectants, etc.
Johnson & Johnson
Currently in its tenth year of economic expansion, Johnson & Johnson’s stock has a reputation as a safe haven. Despite a slight dip in the stock however, it seems like its future will be bright.
Professor Kass from the University of Maryland[3] is bullish on healthcare stocks due to the amount of money that people are expected to spend on healthcare in the upcoming months, thanks to the coronavirus outbreak.
Kass commented: “… several stocks that are currently under the radar for this possible epidemic should do very well as healthcare spending in the years ahead is likely to increase substantially”.
The rationale behind this is super straightforward – Johnson & Johnson sells a wide range of everyday healthcare products to millions of people across the globe. Even people who haven’t been affected by the coronavirus are becoming more and more health-conscious, trying to take precautionary measures through buying products like hand-wash, wipes, sanitisers, disinfectants, etc. At the time of writing this, pharmacies and drug stores in the UK have run out of hand sanitisers due to popular demand. Johnson & Johnson is therefore expected to “continue experiencing rapid growth in revenues and earnings in the foreseeable future,” says Professor Kass.
Thus if anything, the virus’ outbreak could create a long-term positive effect on the Johnson & Johnson stock.
Apple
Thanks to the coronavirus outbreak, global technology giant Apple has been hit hard from multiple angles, with having to temporarily close all corporate offices, stores and contact centres in Mainland China, and suppliers being ordered to reduce or halt production. This was all followed by a 5% drop in Apple’s stock on 31st January, however, Apple will be perfectly fine and remains a stock worth investing in. Yahoo Finance believes that[4] the App Store will get a big boost during the outbreak due to the hundreds of millions of Chinese consumers being stuck at home right now, who will be looking for ways to entertain themselves. Additionally, February doesn’t tend to be a big month for iPhone sales as it is. The company relies heavily on its new iPhone launch in September and by then, coronavirus will be in the past (hopefully).
Apple’s stock remains loved by most investors and will undoubtedly weather the coronavirus storm. Once that’s over, with the release of its 5G iPhone, the tech giant is expected to see huge growth in the last few months of the year.
More and more people choose to not leave their houses amid coronavirus fears across the globe, which means that technology companies that serve consumers at home, such as Netflix, could come out as a winner from the coronavirus outbreak.
Netflix
Despite the tumble in the broader market averages, Netflix stock, along with other home entertainment stocks have been less affected. Netflix stock has made somewhat of a comeback after a solid run in 2018 – it has seen an increase in stock value of some 40% since September. On the stock market [5] on Thursday 27th February, the video streaming provider fell 2% to 371.71 after spending most of the session in positive territory.
Raymond James analyst Justin Patterson commented[6]: "We believe Netflix is in a unique position to benefit from 1) a solid content lineup; 2) normalisation of competitive landscape; 3) increased consumer time spent indoors". It makes perfect senses - more and more people choose to not leave their houses amid coronavirus fears across the globe, which means that technology companies that serve consumers at home, such as Netflix, could come out as a winner from the coronavirus outbreak.
Netflix stock ranks number 15 on the IBD 50 list[7] of top-performing growth stocks.
[1] https://www.fool.com/investing/2019/11/19/why-its-time-to-buy-mcdonalds-stock.aspx
[2] https://www.fool.com/investing/2020/02/25/3-stocks-im-buying-if-the-coronavirus-selloff-gets.aspx
[3] https://finance.yahoo.com/news/7-u-stocks-buy-coronavirus-195612724.html
[4] https://finance.yahoo.com/news/7-u-stocks-buy-coronavirus-195612724.html
[5] https://www.investors.com/market-trend/stock-market-today/stock-market-today-market-trends-best-stocks-buy-watch/
[6] https://www.investors.com/news/technology/click/netflix-stock-home-entertainment-stocks-safe-coronavirus/
[7] https://research.investors.com/stock-lists/ibd-50/
As we celebrate the last decade of fintech, one thing that has stood out is the impact digital lending has had on consumer lending habits - and their options. With more financing options available than ever before, the market is fraught with lending options to suit each need, credit score and repayment condition. Online instalment loans have exploded onto the scene, giving credit card usage a run for its money, while peer to peer lending platforms are now the norm.
In the industry, experts are already looking ahead to 2020 and beyond, predicting the prioritisation of financial health and the vertical integration of fintech across other key industries such as healthcare.
Here are some of the decisions consumers need to keep in mind when considering the multiple fintech credit options available today.
Explore Their Choices
By the end of the first quarter in 2019, 19.3 million Americans had at least one personal unsecured loan outstanding, mainly thanks to the rise of fintech. Wider access to finance options has meant that more of them are turning to personal loans as they continue to live paycheck to paycheck. However, as with most personal unsecured loans, they come with a higher price tag. For unsecured personal loans, the interest rates can range from 5 percent to as high as 36 percent, much higher than the average 19 percent credit card interest rate charged for new credit card accounts. This makes it even more important that consumers do their due diligence when searching for the best loans online.
In 2019, Bankrate put the average interest rate for personal loans at 11 %, and with the influx of online instalment loan lenders, there are even more options with lower rate options. For years, consumers looking for additional finance have thought that high-interest credit cards were their only choice. Now, with the aid of online comparison platforms, consumers can easily find an interest rate they are comfortable with, and more importantly, there is more transparency when it comes to the cost of choosing that particular route.
In 2019, Bankrate put the average interest rate for personal loans at 11 %, and with the influx of online instalment loan lenders, there are even more options with lower rate options.
Check Repayment Terms And Conditions - Including Early Settlement Charges
Yet, this does not mean that borrowers are any more knowledgeable when it comes to the terms and conditions of the loans they are borrowing. In fact, in the United Kingdom, 60 percent of them do not know the rate of their loans, according to research from Mintel, while in the United States of America, Americans are similarly ill-informed. The same can be said for their financial health. In 2019, 43 percent of them didn’t know their FICO scores, a key determinant of their creditworthiness for a personal loan.
However, checking credit scores is now simpler than ever, thanks to credit bureaus and lenders like American Express offering online or mobile login and checking features. Most major credit card issuers offer a view at consumer credit scores from at least one of the three main credit bureaus. Similarly, checking the fine print of personal loans such as passed on charges or early settlement charges that may drive up the total cost of the loan are important. For example, three out of four student loan borrowers (including private loans) do not know what effect their death would have on their loans.
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Assess the Impact on Their Credit Score
Fintech lending options are not only lowering the costs of borrowing, but they are also minimising the reliance on credit scoring as a main determinant of loans. This means borrowers with no past credit scores or a low score can easily get a personal loan, whether it is backed by traditional lenders like the bank or more modern peer to peer lending platforms. This does not necessarily signify that the standards of credit scores have completely been erased. Today’s fintech borrower has a FICO score of 650, compared to the 649 FICO held by traditional bank borrowers. However, a lender with a good credit score may also want to consider the additional credit options open to them, such as approval for credit card offers with 0 percent purchases and balance transfers, lowering the overall cost of borrowing.
Finally, it is interesting to note that the age market that currently holds the largest share of the fintech personal loan market is Gen X (ages 38-52) and Gen Y (ages 24-37). This captures the most tech-savvy and outspoken demographics of the market, matching up perfectly against the transparency and personalisation that fintech loans now offer.
However, even with these added benefits of fintech borrowing, there still remains a basic question that consumers must answer before they enter the world of borrowing: what is the best personal loan option for me?
Analysts had originally predicted that the economy would continue to flatline at 0.1% growth, all the way into November 2019, as had been in previous months. However, the Office for National Statistics (ONS) says the MoM drop happened as a consequence of fall shorts in the production and services sectors. A fall in the pound has consequently led to overall pessimism when it comes to a pending recession.
31st January is the official Brexit deadline, and somehow the UK has managed to avoid recession, but slow growth is pushing the UK in this direction.
In an interview with the Financial Times, Gertjan Vlieghe, of the BoE Monetary Policy Committee, said he would vote for lower interest rates if data doesn’t show the economy picking up. Markets commentators also believe increasing hints that the Bank of England will cut interest rates is likely to prompt investors into overseas financial assets.
Nigel Green, chief executive and founder of deVere Group said: “This is the third senior Bank of England official within a week who has hinted that a rate cut could be imminent.
“In direct response, the pound has come under pressure, as you would expect when relative interest rate expectations change, and it has surrendered its $1.30 level.”
He continued: “The Bank appears to be confused about which risk to fear most.
“Is it a recession and deflation, caused by a no-deal Brexit at the end of this year and decreasing corporate investment over last few years?
“Or is it an overheating economy and inflation caused by a wave of relief if an EU trade agreement is signed that offers minimal disruption to business, combined with a splurge of government borrowing to pay for the Prime Minister’s increased spending plans.”
So, how will the 2019 general election affect business? We take a look at the predictions and what they could mean for commerce.
It’s an election that prime minister Boris Johnson had been chasing for weeks in an attempt to break the Brexit deadlock, but the vote has come sooner than expected for business leaders and the public.
Pundits are calling it a once-in-a-lifetime ‘Brexit election’ and, given those stakes, the impact on British business could be seismic.
Navigating major change from inside the C-suite is rarely a smooth ride. It means creating a backup plan for your backup plan, then running the numbers for each.
Fortunately, corporate speakers and expert journalists were on-hand to offer their insight just as the possibility of an election descended on the City of London at a night aptly called ‘Preparing for Unprecedented Change’.
At the event, former BBC business correspondent Declan Curry stressed that Brexit is just one of the big changes Britain could face in the fallout from the election.
The business and economics speaker said executive teams are also busy making plans for the possibility of a Corbyn-led Labour government.
“Businesses are hearing the commentary that we’ve had since 2017 – that polls indicate that he has absolutely no chance whatsoever of being the next prime minister,” he told the crowd of corporate guests in Barbican, central London.
“But then they remember the polls running up to the Brexit vote were wrong, the polls running up to the 2017 election were wrong, and in 2015 they weren’t exactly models of prediction either.
“And business leaders like to be prepared,” he adds. “So in most major companies there will be someone somewhere – an executive in an office with the door closed – drawing up the plans for ‘what if’.
“What if John McDonnell is the chancellor, what if the idea of having trade union representatives forcibly on boards is enacted? What if there are bans and restrictions on bonuses?”
As we speak, many businesses are preparing for this possibility just as they are preparing for Brexit. Declan added: “This is being mapped out as a theoretical enterprise.”
The event was organised by international speaker bureau Speakers Corner, whose 7500-strong portfolio of orators and experts have already been called on many times to help businesses navigate the uncertainty of Brexit.
In fact, Declan Curry revealed he himself takes professional guidance on the levels of Brexit fatigue in a given audience before taking to the stage.
He was also keen to point out change can bring opportunities as well as risk. Near the Irish border in Donegal, people are “excited for the return of the ancient art of smuggling,” he joked.
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“Brexit will throw up opportunities, too,” said Declan, pointing to law firms currently profiting from all the uncertainty. The former On the Money radio show host said economies are suffering and pondered the idea that another financial crash could be looming – something that could magnify the risk to British business.
This speculation comes as both major parties enter a public spending bidding war that the Institute of Fiscal Studies has said may be undeliverable.
General elections often make markets unstable, but the combined uncertainty around Brexit and the UK’s economic direction is heightening the impact on shares – especially for companies like BT, which could even be partly nationalised under Labour plans.
Still, some business leaders see the vote as an imperfect path to preventing the damage of a hard Brexit. Sonia Sodha, chief leader writer at the Observer, also spoke at the Knowledge Guild event – and she is sympathetic to this view.
“You can see a path to a Labour-led coalition government with Lib Dem and SNP support if Boris Johnson loses a significant number of seats,” she said, but feels an election is not the best way to deal with the Brexit question.
Business owners and C-suite executives have expressed concerns about the risks of a chaotic Brexit since 2016 – and despite continued delays, the risk of no deal remains. The implications could include increased taxes on imports and exports, supply chain delays and staffing supply problems.
“We are going to be talking about Brexit for years to come, whichever outcome,” Sonia told the crowd of central London executives.
For executives concerned with risk management, the turbulence runs in many directions. The only certainty is the election result will spark significant change – whatever the result.
That possibility has pushed many government bond yields to new lows in recent weeks, while global equity prices have been volatile. Below Rhys Herbert, Senior Economist, Lloyds Bank Commercial Banking looks at the evidence.
And while some economic data might be confusing, I think there is a clear message.
First, that global economic growth has slowed and may slow further, and second, that there is a pronounced difference between weak or even falling activity in the manufacturing sector and still relatively buoyant service sector.
So, what might be causing this?
Manufacturing v services
It seems probable that the manufacturing sector is being hurt by the ongoing trade dispute between the US and China. Indeed, the US manufacturing sector is now in decline for the first time in a decade.
And the Bank of England (BOE) flagged last week that, because the trade war between the US and China had intensified over the summer, the outlook for global growth has weakened.
The Bank’s Monetary Policy Committee added that the trade war was having a material negative impact on global business investment too.
The main impact is on confidence - or more accurately lack of confidence – which is holding manufacturers back from investing. As a result, we’ve seen a slowdown in world trade and in demand for manufactured goods.
In contrast, demand for services is being supported by relatively buoyant consumer spending. Yes, consumers are probably reluctant to splash out on big ticket items like cars right now, but overall, they are still willing to spend.
Consumers are probably reluctant to splash out on big ticket items like cars right now, but overall, they are still willing to spend.
The central conundrum
The key question going forward is whether it is more likely that manufacturing rebounds or that service weaken from here?
That is the conundrum that central banks need to weigh up in setting policy.
So far, the majority have decided that they are sufficiently concerned about the downside risks to take out some insurance and adopt policies designed to support economic growth.
Back in July, the US Federal Reserve did something it had not done for over a decade. It reduced interest rates – by a quarter point to 2.25% (upper bound).
It was widely seen as an insurance move against increasing global economic headwinds, emanating mainly from the US-China trade dispute.
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It repeated the move last month, lowering the target range for its key interest rate by 25 points to between 1.75% and 2%. The accompanying statement repeated July’s message that, while economic conditions are probably sound, a bit of insurance against downside risk was advisable.
Meanwhile, in his penultimate meeting in September, this month, European Central Bank President Mario Draghi announced a package of stimulus measures including a reduction in its deposit rate to a record low of -0.5% and the introduction of a two-tier system to exempt part of banks’ excess liquidity from negative rates.
He also announced a resumption of the bond-buying programme at €20bn a month from November and, importantly, signalled no end date to purchases.
Draghi can argue that the weak Eurozone PMI suggests the economy is stagnating, supporting this action.
But the UK has not followed this strategy.
On the sidelines
The BOE is still wary enough about potential inflationary pressures from a tight labour market and rising wage growth to talk about the possibility of interest rates needing to go up.
But last month, the BOE concluded that the longer that uncertainty goes on, the more likely it is that growth will slow, especially given the weak global economy.
We will see if the message changes, but the likelihood is that BOE rate setters will want to continue to remain on the sidelines and keep rates unchanged at 0.75%, not least because the Brexit outcome remains unsettled.
The government’s official preferred Brexit position is for a deal and that assumption in the Bank’s forecast points to interest rates rising “at a gradual pace and to a limited extent”.
But the BOE also noted growing concerns about risks to growth, joining the US Federal Reserve and the European Central Bank, which both seem to have decided that risks are skewed to the downside.
But, while escalating tariff wars, slowing growth in the US and China and Brexit uncertainty mean there are credible reasons to worry that 10 years of steady expansion could be coming to an end, it is still far from certain that the current slowdown means a recession is looming.
Celine Hartmanshenn, Global Head of Credit from Stenn Group, an international provider of trade finance, provides her thoughts on the deficit fall.
The trade gap between China and the US is shrinking, reflecting the overall softening of global trade volumes and hinting at the movement of supply chains out of China.
US macro indicators are mixed. Unemployment remains low and prices are in check. But consumer and business spending has cooled, manufacturing output is at its lowest level in a decade, and the services sector – which accounts for 80% of economic activity – is slowing down. The lingering uncertainty stemming from the trade war and sagging global economy has caused the outlook for 2020 to dim, with the expectation of the US limping along at 1-2% GDP growth. It’s not an outright recession, but it’s certainly not a boom either.
There’s no denying that the US-China trade war is a drag on the US economy. The disruption to supply chains is expensive for businesses, the tariffs now cover a wide range of goods, and because financial markets can’t quickly adjust, they are more volatile.
So, what’s the solution? Certainly not a tariff war with the EU. The US will implement its first tariffs on aircraft and agricultural goods in 2 weeks. The EU is likely to retaliate. The aftershocks could easily tip the US into recession.
The world will be watching this month as China and the US go back to the negotiating table. Whether they like it or not, these two economies are interconnected. China is dealing with massive overcapacity, high debt levels and a need for US dollars. And the US relies on China pumping these dollars back into the US to fund its debt.
New research has revealed that people are increasingly less willing to follow the money to big economic and urban centers and are instead choosing to live, work and invest in places that give them better quality of life - and in turn the money is following them. Here Enshalla Anderson, Chief Strategy Officer at FutureBrand North America, provides her thoughts on the changing economic landscape.
This recalibration of global economies and workforces has come to light in our latest Country Brand Index, which re-orders the World Bank’s top ranking 75 countries (in terms of GDP) by how well they’re perceived against an alternative set of factors, such as value system, business potential, environmental friendliness, culture and tourism.
In the index, ‘quality of life’ was the attribute that averaged the highest in the top 10 countries, and averaged lowest in the bottom 10. In line with this are the findings that people are placing increasing importance on tolerance and environmental factors in the choices that they make about where they work, live, and visit. This is set to radically change how countries and companies organize themselves to attract talent, tourism and investment.
In the meantime, the so-called Fourth Industrial Revolution, defined by the arrival of substantial technological change, has transformed our day-to-day reality. Individuals now have more freedom to choose where they live and how they work, and they’re exercising that choice. The arrival of 5G marks a tipping point in all of this this and as telco companies roll out 5G services, we’re likely to see a spreading out of the intellectual capital across the country, instead of being isolated to the key economic hubs.
Meanwhile, we’ve observed businesses with aspirations for global growth actively avoid expanding in the expected international locations and instead set-up in relatively obscure or peripheral locations. They’re looking ahead and taking advantage of this diversifying workforce – tapping new talent, creating new opportunities for people who don’t want to live in the big cities and desire to work remotely, and benefitting from favorable tax rates and perks from regional governments along the way.
The groundswell of environmentalism is also fuelling this shifting balance of power. People are finally beginning to look beyond their household and increasingly making more personal choices of scale and import based on environmental impact and concern. This often means prioritizing ways of living and working that are less harmful to the environment, and in turn better for people’s physical and emotional wellbeing. It can also mean choosing an employer because of their stance on sustainability. By necessity, big corporates, and in turn governments, are having to prioritize facilitating this shift if they want to attract and retain the best talent.
Most recently, New Zealand (ranked no.11 in the index) has been one of the major examples of the big rebalance in power that’s taking place. Prime Minister Jacinda Ardern’s national budget balances goals that encourage the well-being of citizens (such as tackling mental health, child poverty, inequality and the environment) with traditional measures such as productivity and economic growth. Her rapid response to gun control following the Christchurch attack also asserted a genuine and urgent focus on safety and wellbeing that has set a new precedent and benchmark for other governments around the world.
There’s a growing opportunity for countries like New Zealand, and also smaller nations and cities, to compete with bigger counterparts who have more economic might than them on attributes like quality of life, tolerance and environmental concerts to attract greater tourism, trade and investment. It also serves as a warning sign for countries such as China, US and UK, who’ve scored lower in some or all of these crucial measurements, that if they don’t follow suit they’ll have to rely on doubling-down on economic might and power, which citizens, tourists and investors alike are growing increasingly less attracted to as a sole measure of country strength.
Trump vs. China
Back in 1930, the US introduced the Smoot-Hawley Tariff Act, which raised their already high tariffs, triggering a currency war and, as economists argue, exacerbating the Great Depression. With President Donald Trump’s threat to put 10% tariffs on the remaining $300 billion of Chinese imports that aren’t subject to his existing levies, sending markets tumbling from Asia to Europe, the question on everyone’s lips is: Is history about to repeat itself?
In August, in a bid to hit back against Trump’s administration, Beijing allowed the Chinese yuan to plummet past the symbolically important $7 mark. Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.
As protectionist actions escalate and US-China relations continue deteriorating, investors and markets have been growing increasingly concerned even though Trump has delayed the imposition of his new tariffs until December. A full-blown trade war wouldn’t be good news to anyone and could seriously weaken the global economy, as the IMF has warned, making the world “poorer and more dangerous place”. Both sides are expected to experience losses in economic welfare, while countries on the sidelines could experience collateral damage. Furthermore, if tariffs remain in place, losses in economic output would be permanent, as distorted price signals would prevent the specialisation that maximises global productivity. The one thing that’s certain, no matter how things pan out, is that there will be no winners in this war.
Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.
Cyberattacks & data fraud
Millions, if not billions, of people’s data has been affected by numerous data breaches in the past couple of years, whilst cyberattacks on both public and private businesses and institutions are becoming a more and more frequent occurrence. With the deepening integration of digital technologies into every aspect of our lives and the dependency we have on them, cybercrime is one of the greatest threats to every company in the world.
Cyberattacks are rapidly increasing in size, sophistication and cost, as cybercrime and data breaches can trigger extensive losses. In 2016, Cybersecurity Ventures predicted that cybercrime will cost the world $6 trillion annually by 2021, up from $3 trillion in 2015. According to them, ”this represents the greatest transfer of economic wealth in history, risks the incentives for innovation and investment, and will be more profitable than the global trade of all major illegal drugs combined”.
Emerging Markets crisis
Since the early 1990s, emerging markets have been a key part of investors’ portfolios, as they have been offering strong returns and faster growth. However, global trade tensions, a stronger US dollar and rising interest rates have hit emerging markets hard. Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns. Emerging markets are the ones feeling the strain and financial panic has been gripping some of the world’s developing economies.
With political instability, external imbalances and poor policymaking which has led to full-blown currency crises in the two nations, Turkey and Argentina have been at the centre of an emerging market sell-off last year. But they are not the only emerging economies faced with a currency crisis – according to the EIU, some economies which are already in the danger zone and could suffer from the same currency volatility include Brazil, Mexico and South Africa.
Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns.
If the currency crises in Turkey and Argentina continue and develop into banking crises, analysts predict that investors could abandon emerging markets across the globe. “Market sentiment remains fragile, and pressure on emerging markets as a group could re-emerge if market risk appetite deteriorates further than we currently expect”, the EIU explains.
Climate crisis
In recent months, the media is constantly flooded with reports on the horrifying environmental risks that the climate crisis the Earth is in the midst of poses, but we’re also only starting to come to grips with the potential economic effects that may come with it.
Despite the significant degrees of uncertainty, results of numerous analyses and research vary widely. A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP. The Stern Review, presented to the British Government in 2006, suggests that this could happen because of climate-related costs such as dealing with increased extreme weather events and stresses to low-lying areas due to sea level rises. These could include the following scenarios:
- Decrease in agricultural areas crop yields due to hotter weather and draught.
- Rebuilding roads that have been destroyed by flooding caused by rising seas and more frequent hurricanes.
- Having to build more efficient power grids because the existing ones are not able to withstand extreme weather conditions.
Due to climate change, low-lying, flood-prone areas are currently at a high risk of becoming uninhabitable, or at least uninsurable. Numerous industries across numerous locations could cease to exist and the map of global agriculture is expected to shift. In an attempt to adapt, people might begin moving to areas which will be affected by a warmer climate in a more favourable way.
A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP.
All in all, the economic implications of the greatest environmental threat humanity has ever faced range from massive shifts in geography, demographics and technology – with each one affecting the other.
Brexit
Fears that the UK could be on the brink of its first recession in 10 years have been growing after figures showed a 0.2% contraction in the country’s economy between April and June 2019. A weakening global economy and high levels of uncertainty mean the UK’s economic activity was already lagging, but the potential of a no-deal Brexit and the general uncertainty surrounding the UK’s departure from the EU, running down on stock built up before the original 29th March departure date, falling foreign investment and car plant shutdowns have resulted in its GDP decreasing by 0.2% in Q2. This is the first fall in quarterly GDP the country has seen in six and a half years and as the new deadline (31st October) approaches, economists are concerned that it could lead to a second successive quarter of negative growth – which is the dictionary definition of recession.
And whilst the implications of Brexit are mainly expected to be felt in the country itself, the whole Brexit process displays the risks that can come from economic and political fragmentation, illustrating what awaits in an increasingly fractured global economy, e.g. less efficient economic interactions, complicated cross-border financial flows and less resilience and agility. As Mohamed El-Erian explains: “in this context, costly self-insurance will come to replace some of the current system’s pooled-insurance mechanisms. And it will be much harder to maintain global norms and standards, let alone pursue international policy harmonisation and coordination”. Additionally, he goes on to note that tax and regulatory arbitrage are likely to become more common, whilst economy policymaking could become a tool for addressing national security concerns.
“Lastly, there will also be a change in how countries seek to structure their economies”, El-Erian continues. “In the past, Britain and other countries prided themselves as “small open economies” that could leverage their domestic advantages through shrewd and efficient links with Europe and the rest of the world. But now, being a large and relatively closed economy might start to seem more attractive. And for countries that do not have that option – such as smaller economies in east Asia – tightly knit regional blocs might provide a serviceable alternative.”
Despite ongoing trade and political tensions being a primary contributor to Emerging Market weakness across 2019, there are still considerable opportunities for growth in markets that are currently being under-represented across the Emerging Market indices. Turkey, Argentina, Chile, Mexico, and Peru all have relatively low weights in EM indices but are increasingly gaining recognition for providing more diverse investment opportunities than they were a decade ago.
Of course, there are risks involved with investing in these markets: political instability, domestic infrastructure problems and currency volatility can serve as a hindrance, but despite this, there are the prospects for high returns. These smaller emerging markets provide investors scope to diversify equity exposure.
Turkey
Although Turkey has been considered an emerging economy for decades, we have only seen the country’s true potential in recent years. Turkey’s status has been elevated due to its strong, though uneven, economic growth under some world-class companies, growing military, active diplomacy, as well as its increased autonomy, all of which have contributed towards its increased recognition as a potential power and nation of strong economic influence. However, in recent years, the country has faced some political changes that have brought in some turbulence into its financial markets.
Although the country was hard-pressed under the fall in the value of the Lira, it has demonstrated meaningful resilience and strength.
The Turkish Government has also worked hard to ‘maintain economic stability’ by continuing negotiations with European Union countries, consolidating its position within the Syrian crisis, creating a normalisation process with the United States and improving its co-operation with East Asian countries. Turkey has reaped the benefits of these efforts as the country carefully navigated its way to sustainable economic development.
Although the country was hard-pressed under the fall in the value of the Lira, it has demonstrated meaningful resilience and strength. The Turkish people are accustomed to instability and Turkey remains an emerging economic power.
The LATAM giants
The Latin American economies of Mexico, Brazil, Argentina and Colombia are expected to grow in power in 2020 as GDP improves. The GDP in Argentina is predicted to grow from recession to 2.2% growth next year though this may be affected by recent political instability. Mexico has continued growing despite a general slowdown and Brazil and Colombia have outperformed expectations. Against a challenging backdrop and series of considerable hurdles, LATAM countries are continuing to show strong growth prospects.
Despite ongoing political instability in these markets and the risks posed by their increasing dependence on exports from China, these countries have strong business-friendly governments in place which can ensure sustainable growth and economic prosperity. These markets are expected to continue growing at a moderate pace, showing economic resilience and ultimately proving a viable option for long-term investment opportunities.
South Africa
South Africa has recently been identified as a major player in the Emerging Market space. Having previously been recognised as one of the ‘fragile five’ as recently as 2013, this may come as a surprise to seasoned investors who have witnessed the nation’s resulting struggle towards reformation and stable growth.
However, in the first months of 2019 and like many other emerging markets, the country has faced its fair share of struggles. With unemployment reaching a 15-year high of 27%, and the economy contracted by 3.2%, the country marked the biggest quarterly slump in a decade and has made the uphill battle even steeper.
Amidst the current economic struggles and the fact that China, South Africa’s largest trading partner, is once again embroiled in trade conflicts with the United States, the country is working to manoeuvre away from slipping into a debt crisis.
Amidst the current economic struggles and the fact that China, South Africa’s largest trading partner, is once again embroiled in trade conflicts with the United States, the country is working to manoeuvre away from slipping into a debt crisis. While its implications are currently not seen as lasting, the country continues to suffer from a lack of capital depth which could ultimately lead to a state of increased economic volatility.
Despite the challenges that are currently looming over the world’s emerging economic markets, the hurdles that have been overcome and the presence they have managed to establish thus far have put them in much better standing than what could have been anticipated. Internationally speaking, the market’s current economic heavyweights need to consider the detrimental impact that their disputes have on emerging economies. Addressing trade disputes with a more measured, constructive and perhaps considerate approach could provide fledging economies with the stability they need to progress, find their footing and ultimately cultivate a presence on the world stage.
The deadline to negotiate the exit was recently prolonged to October 31st, 2019. What are financial and economic consequences going to be for the UK? Public opinion has changed a lot lately. Theresa May has stepped down from the position of the UK’s Prime Minister and got replaced by Boris Johnson on 24th July. He promised that Brexit is going to be executed by 1st November with or without a deal with the European Union. Labour party demands another vote, as their members don’t think that leaving the EU would be a good idea at this moment.
Great Britain would no longer have the tariff-free trade status with other European countries if they decide to leave without a deal. This would have a significant increase in exports cost and automatically make the UK goods more expensive in Europe and potentially weaker the British Pound.
The prices to import goods to the UK would be higher, which also means some of them would simply reconsider distribution to Britain.
The same thing would happen with European merchants. The prices to import goods to the UK would be higher, which also means some of them would simply reconsider distribution to Britain. One-third of the food is coming from the European Union, which means inflation and a lower standard of living would be inevitable for UK residents. No deal agreement could also reignite the issues with North Ireland. This country would stay with the UK but there would be a custom border introduced between them and the Republic of Ireland. The last two things we would like to mention as a potential consequence of no-deal exit are rights for EU citizens living in the UK and outstanding bills. In case of an exit like this UK would have to pay $51 billion of debt and find a solution to guarantee rights to EU people within their borders.
Hard Brexit is the second alternative, and it is different in so many ways than the above-mentioned exit. This one would include a trade agreement with the EU; but this would require another re-schedule of the exit, as there is no enough time to negotiate it. Hard Brexit could have serious consequences on London as the financial centre. A lot of companies would stop using it as an English-speaking entry to the European Union economy. Also according to the latest research, more than six thousand people could lose jobs because of this and turn the real estate market into a disaster. There would be hundreds of office buildings in London sitting empty, without anyone to rent them. By comparing housing prices now and two years back, the price has already started to drop drastically. Another significant impact on UK companies would be the inability to place bids on public contracts in any European Union zone. This would take a massive toll on banking as well. Best betting sites experts have publish some odds that show that Hard Brexit deal would also increase costs of mobile phone services and airfares. Could the UK lose Scotland in case of Hard Brexit agreement? Potentially, yes. Scotland might have a bigger advantage of being an EU member, which also means a referendum to leave the United Kingdom. One of the most profitable industries in the UK is online gambling, and this one shouldn’t be affected much by any option.
