The Government’s original furlough scheme was probably the best-executed part of its pandemic response. Its successor jobs scheme also looks sensible, alongside loan scheme extensions and a continuation of the VAT holiday for the hardest-hit corners of the economy.
The Chancellor’s new package of support will help tide us over the challenging winter months ahead. That’s the good news. Less encouraging is the message they confirm about the health of the British economy as new restrictions kick in and we head towards what could be a damaging no-deal Brexit.
Rishi Sunak has come out of his latest high-profile Commons statement looking increasingly like the firmest hand on the tiller. But he has been given a weak hand to play. The steady flow of job losses, most recently this week from Whitbread, confirm that in the absence of government support many jobs are not viable.
The new scheme is a sensible compromise. It offers generous support but avoids keeping people in jobs that have no future. Companies must pay workers as normal for at least a third of their hours, with the Government picking up the tab for two-thirds of the lost wage.
Extending the 5% reduced VAT rate for the hospitality sector is a good way of easing the pain for an industry that is an important employer in the UK. Extending bounce-back loan repayments over ten years will help reduce the cost for many cash-strapped businesses.
The reaction of the FTSE 100 to the Chancellor’s statement was instructive, however. After the volatility at the start of the week, markets greeted the measures with a shrug. They don’t really change most investors’ view of the UK. It remains one of the most out-of-favours corners of the global stock market.
The reasons for that are obvious. The Government’s handling of the Covid crisis has been widely criticised as inconsistent, slow and, at times, simply incompetent. The UK economy, skewed as it is to retail and services, has been particularly vulnerable to the impact of lockdown. Adding to this unpalatable mix is the prospect of the hardest of hard Brexits in January.
From an investment perspective, the UK stock market is notably lacking in the main beneficiary of the pandemic, technology. It does have a decent weighting in pharmaceuticals but its other dominant sectors - banking and energy in particular - are not where investors want to be right now. Banks will struggle to generate a decent return in a lower-forever interest rate environment. The oil majors are battling with a vicious cocktail of weak demand and climate change.
The underperformance of the UK market since the early summer has been striking. Having bounced from the March lows along with most other global markets, it has moved sideways or backwards ever since. By comparison with markets like the US, the UK has continued to fall behind over the past three or four months.
This is starting to be reflected in more attractive valuations for British shares than their counterparts in the rest of the world. The average PE multiple for the FTSE 100 is now about 15 compared with 20 in the US. Even out of favour Europe and Japan are more expensive than the UK. After the cuts in dividend payments this year, the yield on the FTSE 100 should be about 4% in the year ahead.
That’s an average. For investors willing to roll their sleeves up and do the hard work of deciding whether dividends are sustainable and likely to be covered by earnings and cash flow, there are plenty of opportunities to pick up much higher pay-outs than this. Many of the companies which stopped their dividends, not because they had to but because they thought it looked better in the early days of the pandemic, could well start re-introducing pay-outs in the months ahead.
So, for contrarians, a decent enough case can be made for the UK on valuation grounds. But to back our home market today demands we go against the consensus, which understandably sees better opportunities in markets where there are fewer things to worry about.
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