Beyond the Bad News
Thursday, 11/05/2020 09:01
UK companies are beating miserable outlook...
MARKETS have wobbled as Europe goes back into lockdown and the US holds off on further stimulus,
writes John Stepek at MoneyWeek.
But companies in the UK are reporting better than expected results. Can this last, and should you buy?
Investors suddenly seem to have woken up to a few things.
One – there won't be a new American stimulus package before the US election. Two – the election result might take a while to resolve, which would delay stimulus further. Three – meanwhile we've got full-on lockdown part II sweeping across Europe. No wonder we're feeling a bit gloomy.
It's all rather ironic – because most of the company news that has come out has been pretty good.
Companies across the FTSE 100 are beating expectations. I wrote about how detested the banks and the oil companies are earlier last week. As the week went on, it became ever clearer that investors have been overly concerned about just how bad things are in those sectors.
Lloyds Bank then joined the rest of the banks in posting third-quarter results that were better than expected. For Lloyds – which doesn't have an investment banking division – the main boost has been the sheer quantity of mortgage business being done right now. Lloyds remains, to a great extent, a bet on the UK housing market, and thus on the UK jobs market. But, as I've written here before, it's not at all a foregone conclusion that the housing market is going to collapse.
In fact, it's not surprising that activity has accelerated. If you can work from home – and you're also at risk of being trapped at home – then there's no reason to put up with your cramped city accommodation when you can trade it in and trade it up for somewhere much bigger, located somewhere much nicer. We'll see what happens, but even in the event of another full-on lockdown, I'm not convinced we'll see the sort of house price crash that some might hope for.
What about oil? Well, Royal Dutch Shell came out with its own third-quarter results. Believe it or not, it hiked its dividend. This comes just a few months after Shell succumbed to the inevitable and cut its payout for the first time since World War II.
Why raise the dividend? Because Shell says it's confident in its ability to "grow our businesses of the future while increasing shareholder distributions," as chief executive Ben van Beurden.
In effect, it's the same investment argument as you might make for BP. You get a company which is already sitting on big reserves of a valuable commodity that it can easily turn into cash. At the same time, it has slashed spending on the expensive part of the business – exploring for more of said commodity. Meanwhile, you get an option on the "green" side of the business.
And another FTSE 100 pariah that managed to outperform lowered expectations is telecoms group BT. It now expects full-year earnings to come in higher than it had feared.
The problem is, it's very hard to stay focused when the news is quite as relentless as it is at the moment. The pressure is clearly mounting for Britain to follow in the footsteps of its European neighbours and lock down harder. Given the internal competition to see who can be the most authoritarian country in the United Kingdom (Scottish government representatives are now debating how to police speech within private homes), I imagine it'll come sooner rather than later.
Meanwhile, we can't get away from the never-ending story of US politics. I'm not very interested in most other countries' voting minutiae and I find our constant, desperate poring over American cultural and political issues somewhat demeaning. But as an investor, it feels like you can't really ignore the US stock market, because it's such a dominant influence on the rest of them.
However. Let's get some perspective. Take a deep breath. The US will eventually have a president. One way or another, they'll be spending money on stuff. And Covid, meanwhile, will eventually become less important. In a decade's time, we'll have other things to worry about. And today's market action will be a blip on a chart.
So if you're an individual stock picker, try to blot out the noise. Are the companies you're interested in cheap, relative to their prospects? Will they survive Covid-19? (A clue – if they're a big blue-chip company and they have so far, they probably will continue to do so.) Then they're probably worth at least building a position in.
And if you're more of a long-term funds investor, well – carry on drip feeding your money into the markets. Keep an eye on your financial goals. Make sure you're happy with your asset allocation. In other words, just do what you'd be doing if there was no global pandemic, and no presidential election.
I'm not saying that truly disruptive events can't happen – they can and they do. But that's why you should already be holding a bit of financial insurance like gold, and it's why you should already make sure you've got an emergency cash fund built up. The time to prepare is during the good times, not during the jittery times.
So if you have a plan and you're still happy with it, stick to it. If you don't have a plan, get one.
Email us