17 Sep 2020
11 September 2020 | Jupiter Independent Funds Team
The one fifth decline in UK GDP in the second quarter could, without any fear of exaggeration or hyperbole, be described literally as ‘unprecedented’. Now confirming what we have been seeing for several weeks in improving unofficial high frequency data (credit card usage, retail footfalls, traffic congestion, passenger movements, electricity consumption etc), UK GDP saw a recovery of 6.6% in July. A rolling three-month analysis tells us that the May-July period saw the economy shrink by 7.6% compared with over 20% between April and June. In nominal terms, the economy is still 11.7% smaller than it was in February before Covid began dominating events but at least the period since lockdown was relaxed has re-kindled some economic benefit. Whether this week’s reintroduction of more draconian restrictions to indoor and outdoor social congregation (the Rule of Six) takes momentum out of the recovery, just as some semblance of normality returns to workplaces and schools, remains to be seen.
Brexit returns centre stage with yet another row, this time inspired by the UK government’s insistence on overriding elements of the Withdrawal Agreement, already signed into international law. Although the UK government is on thin ice, the EU’s confected rage is undignified given the extent to which it flouted the explicit instruction in Article 5 of the Lisbon Treaty (the passage governing the means by which an EU member state may effect an orderly exit) to negotiate ‘in good faith’. From a Jupiter Merlin perspective, we repeat our position that trading with the EU on WTO Rules holds no fear for us.
The European Central Bank (ECB) held its scheduled policy meeting this week and, amid much speculation that it would tackle the problems being created by the rapid recent appreciation in the value of the euro (its trade-weighted value against a basket of major currencies has risen 7% this year), it left its interest rate and bond-purchasing programme unchanged. In line with G7 convention, ECB President Christine Lagarde said it is not for central banks to comment on exchange rates.
The eurozone is now in a pickle: despite decent economic recovery being apparent, prices are not only decelerating but falling: the latest eurozone inflation data saw prices fall 0.2% in August (France has domestic inflation of 0.2%, but German prices are static while Italy, Spain and Greece saw prices fall by 0.5%, 0.6% and 2.1% respectively). Governments and policymakers fear deflation: falling prices cause consumers to delay purchases in the expectation of being able to buy goods more cheaply later. Eventually it leads to economic contraction. For the big exporting countries, particularly Germany and Italy, the latter already labouring under the burden of a relatively uncompetitive cost base, a rising exchange rate makes their exports more expensive creating further potential difficulties.
Thanks to five years of negative interest rates and then entering the Covid crisis still with those rates below zero (indeed the ECB reduced them further in March from minus 0.4% to minus 0.5%), the central bank is finding that imposing a cost to owning euros is no disincentive to investors owning them and the fact that the ECB has just signalled its unwillingness to boost stimulus measures adds to the relative attraction of owning euros now, thus pushing the exchange rate higher. It is an unenviable position, complicated by the fact that, unlike homogenous economic systems such as the UK, US and Japan, the eurozone still labours under a regime which has 19 countries sharing a common interest and exchange rate, regardless of their individual economic, political and social circumstances, while not having a symmetrical, complementary fiscal union to create a fully integrated economic system.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions. The recent conditions have indeed been challenging; pleasingly, the Jupiter Merlin Portfolios have held up well.
Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
Fund specific risks: The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.
Important Information: This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Past performance is no guide to the future. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Holding examples are not a recommendation to buy or sell. Quoted yields are not guaranteed and may change in the future. Issued by Jupiter Unit Trust Managers Limited (JUTM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ which is authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM. 26156