12 June 2020
4 minute read
Investors will be paying close attention to the Bank of England’s Monetary Policy Committee (MPC) meeting on 18 June. There is an increased likelihood that the meeting will see bank bond purchases rise by £100bn, on top of the £200bn actioned in March, bringing total purchases to £745bn.
The UK’s April International Labour Organisation unemployment rate on Tuesday will hint at how well the economy is performing during the COVID-19 pandemic. The unemployment rate is likely to surge given that the economy was on full lockdown for the month.
May’s UK retail sales data are likely to show continued subdued activity, as consumers remain cautious despite the gradual lifting of quarantine measures. UK retail sales in April usurped March as the worst slump on record, at -18.1%, month on month. Chinese consumers are also taking time to resume spending, with retail sales declining 7.5% year-on-year (y/y) in April. However, consensus is for a slip of 2.0% y/y in May.
With many US states reopening in May and the restoration of 2.5m jobs in May, consumption may fare better in America. The market anticipates 7.0% y/y growth. The implications of reopening more activity may also show up in the initial jobless claims data on Thursday.
Chinese and American industrial output data for May is expected to show clear signs of recovery after containment measures were lifted. In China, expansion of 5% y/y is expected after 3.9% in April. In the US, growth of 2.4% m/m is anticipated after a 11.2% plunge in April.
Once again, “cheap stocks” are back in the spotlight. Indeed, the “value” style has experienced a very sharp rebound since mid-May, gaining more than 15%. This has reignited the debate about the outperformance of growth and the long-awaited come back of value investing.
As we discussed previously, the debate between value and growth appears misplaced. First, because it seems like the more the former underperforms, the sharper its potential rebound is likely to be and the harder it will be for investors to capture it. While value has outperformed growth by 7% and momentum by 12% in the 20 trading sessions to 9 June, on a year-to-date basis, value lags both by 17% and 13% respectively (see chart).
In other words, timing is critical to capturing value and, unlike growth strategies, you’re a not “getting paid” to wait. Indeed, while growth companies benefit from the positive effects of compounding, value stocks have to be bought when earnings trough and sold when they peak.
Second, instead of having to decide between growth or value, investors could simply focus on the quality of the companies they invest in.
The quality of companies cuts across both growth and value. This means that as a factor, it can improve the performance of each world, avoiding any value traps and ensuring that growth is sustainable. This might explain why quality stocks have been able to keep up with value ones in this latest leg of the rally, while matching growth and momentum performance over the medium term.
After four rounds of negotiations, discussions between the UK and its European counterparts seem to have made little progress. As the EU and UK leaders prepare to meet, what are the implications for UK assets?
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