Fascinating few months ahead as we move into the sunlight
THE wonderful spring weather does much to lift everyone's spirits and when it is combined with the long-awaited easing of lockdown, optimism seems all pervasive. Everywhere shops are re-opening and freedom beckons as social interaction face to face becomes possible once more.
It has been anticipated that the end of lockdown will lead to a strong rebound in spending and so far this is proving to be the case: retailers are reporting a strong bounce in activity and in the first week of reopening, footfall soared by 87 per cent. After the biggest contraction in the economy for 300 years in 2020, forecasts for growth are being upgraded within weeks of being released.
This is promising indeed. The global pandemic is however, far from over – the scenes we see from India are distressing in the extreme and it is not alone in seeing another wave of Covid-19, which means that while there are small victories here, such as shops and hospitality reopening, there is a long way to go until we get back to “normal” and that might look very different.
The strong surge in spending should also be tempered by reality: the business rates holiday ends in June which may mean a cash crunch for some businesses and the end of the furlough scheme in September may well lead to a sharp rise in unemployment.
There is also the very real consideration of how we will pay for the pandemic. We have seen unprecedented levels of government support on a global basis leading to eye-watering levels of debt: it currently stands at £2.14 trillion or 97.7 per cent of economic output as measured by gross domestic product.
This is set to rise further over the next few years and there is no magic way of dealing with this extraordinary level of debt. We will have higher public debt for years to come and maintaining the confidence of the markets will be crucial.
Turning to the markets, there has been surprise expressed that they are holding up so well in the face of such adversity. So far this year the European index is up just over 10 per cent, the S&P 500 is up by just under 9.5 per cent and the FTSE 100 is up by 7.4 per cent.
We have seen a fall in the level of volatility: the Vix index (which measures the implied volatility of the S&P500) has fallen to its lowest level since December 2019. Although this may seem reassuring, we get low volatility when traders are at variance, with as many being optimistic as pessimistic, thus it is rather a sign of disagreement.
Perhaps it is prudent to sound a note of caution: recent flotations have met with mixed success, usually not a positive sign. There appears to be conflicting influences on the global markets at present and it is certainly one of the most interesting times in my 35 plus year career. The next few months seem set to be fascinating as we once again move into the sunlight.
:: Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.