UK reopens, but are people spending?
Dan Nickols, Head of Strategy, UK Small & Mid Cap, looks at recent GDP and housing data from the UK for signs of whether May’s slowdown has wider implications or if consumers remain relatively bullish as society reopens.
In May, the UK experienced what was – optically, at least – a ‘miss’ for GDP growth. My view at the time was that was more a function of a temporary shortfall in inputs rather than a fundamental lack of demand. Data for the whole of Q2 (+4.8% growth versus -1.6% in Q1) seems to bare out that view.
Within that, the areas of strength were consumer spending and government spending, with the main source of disappointment being net trade particular services exports. It is hard to unpick whether Covid travel restrictions or post-Brexit effects are to blame, but any impact of the former should ease sooner rather than later.
In general, I think the Q2 GDP figures paint a benign picture of the UK’s economic growth prospects. Monthly data from June backs that up, representing the first full month of re-opening, when services grew by over 10% and there was a bounce back in transport equipment manufacture.
Elsewhere, pricing and activity levels in the UK housing market continue to be strong despite the end of the “stamp duty holiday”. This makes sense, given the strength of the labour market, low interest rates, pent up savings, and the post-pandemic desire for many people to move out of city centres in search of more space. The data contains a lot of noise, and completed transactions for July are likely to be lower than June, but we can see from the very high levels of mortgage approvals in June that people were continuing to be active in the housing market even for transactions that would complete after stamp duty was raised back to previous levels.
The wealth and confidence effect from housing on consumer behaviour remains intact, in my view. As an investor that means I continue to favour disruptive growth stories although, given the benign economic backdrop, I can absolutely see space for opportunities in economically sensitive areas where recovery is yet to be fully priced in.
Headlines, not fundamentals, drive China real estate volatility
Alejandro Arevalo, Head of Emerging Market Debt, discusses recent volatility in the Chinese real estate sector. He also looks at other recent news that has been driving emerging market debt.
Recently, the Chinese real estate sector has been the main source of volatility in emerging markets (EM). This has been driven by headlines about property developer Evergrande, amid fears it cannot repay its debt of more than $100bn. Nothing has really changed fundamentally, but the newsflow has been dragging down the whole real estate sector.
After selling off sharply last month, we saw a bounce in the sector last week. Evergrande has no public bonds maturing this year, and the next big maturity isn’t until March 2022; while the situation could change, we think it will continue to muddle through. However, this is continuing to create uncertainty. Down the line, it is also likely to put pressure on smaller, more leveraged companies, which won’t be able to refinance.
Now, the Chinese government has announced that only qualified institutional investors will be able to buy onshore bonds. Previously, one of the main problems has been that private banking has been heavily involved in the Chinese bond market, and it’s mostly driven by headlines, which creates lots of volatility. If you have a scenario like Evergrande defaulting, the government will want to protect those investors as much as possible.
Elsewhere in EM, we saw Turkish bonds rally on the back of the central bank’s decision to keep interest rates on hold, at 19%. Inflation continues to be a concern, and we’ve seen a huge rebound in the economy after coming out of lockdown. Many investors, including us, were concerned that the central bank would start to cut interest rates, as President Erdogan decided to fire the previous central bank governor because he raised rates. It is encouraging to see the current governor keeping rates high, though there is some uncertainty about how long he will remain in his position if he continues to do so.
We also saw the takeover of Afghanistan by the Taliban, which will have tragic humanitarian consequences for the people of Afghanistan and the broader region. As a result, bonds issued by neighbouring countries have sold off in recent days, largely due to concerns that refugees fleeing to these countries will put strains on their finances. Pakistani bonds, in particular, took a large hit, though they recovered somewhat following news it would receive $2.8bn from the IMF. As Uzbekistan has a debt to GDP of around 30% and a strong growth rate, we believe it should be able to weather shocks. Exposure to the region in our strategy remains extremely limited, and we will continue to monitor the situation.
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