RE: The C-19 Crash15 Aug 2020 14:55
Tale of two Cities: FTSE 100 rises despite economic collapse The economic collapse in Britain during the second quarter of 2020 was the most brutal on record. Unemployment is forecast by the Bank of England to soar to 2.5m by Christmas. The Brexit cliff edge approaches. Yet in the City, the FTSE 100 has been on the up.
Never has the disconnect between financial trading and economic fundamentals appeared so extreme. What explains surging asset prices (the FTSE jumped 2% on the same day it was revealed the economy had slumped by 20%) when the outlook for many workers is so grim?
The “bulls” (market optimists) say the recovery in shares is relatively easy to explain. The collapse in GDP is old news, June alone saw a better-than-expected 8.7% bounce-back, consumer spending and house purchasing is returning to pre-pandemic levels and households are stuffed with cash they did not spend in lockdown. Share prices on the London stock exchange are also largely detached from the UK economy. In a normal year, about 70% of the revenues generated by FTSE 100 companies come from overseas. Even if unemployment surges, and consumer spending in the UK fails to recover fully, the stock market can continue rising.UBS, which styles itself as the world’s “leading wealth manager” with $2.3tn under management, thinks UK shares, and sterling, will go even higher. Its economist Dean Turner said the worst of the slump in the economy is over, there is a strong bounce-back in activity, and pent-up consumer demand will power a strong recovery later in the summer and into autumn.
“In our view, UK assets look undervalued. In this environment, we continue to maintain a preference for UK equities relative to other eurozone stocks, and expect sterling to strengthen versus a weaker US dollar over the next 12 months,” said Turner.
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