Last week saw cautious markets checking which way the wind is blowing for the second half of the year. On Wednesday, chancellor Rishi Sunak delivered his summer statement. As expected, it set out the government’s plan to minimize the economic damage of the coronavirus. This included several measures to head off a looming spike in unemployment. The government’s plans will cost around £189bn this year and the overall deficit could be more than £350bn. That’s around twice the peak deficit after the financial crisis. Whether this is enough will only become clear in time. A slight fall in gilt yields suggests bond markets remain comfortable with the increased rate of issuance.
Although Chinese equities were up around 10 per cent, most financial markets appear to be a bit more pessimistic. The global total of confirmed coronavirus cases rose to above 12 million last week. Furthermore, the US continues to set daily records for new infections. So, recovery may take longer than had been expected. The more negative outlook meant many equity markets were slightly down last week. Unsurprisingly, so too were sovereign bond yields.
CHINA: Equities Up as Citizens Urged to do their Duty
The recent surge in Chinese equities has seen them overtake the US as the best performing stock market this year. The CSI 300 index is up 30 per cent in the last three months. That’s also up 16 per cent for the last six months. In comparison, the S&P 500 is up 22 per cent over three months. And it is down 3 per cent over the last six months.
Most of China’s gains have come in the last month, with the index up 22 per cent in the last 30 days. While some of the positive sentiment is from China’s relatively rapid recovery from the coronavirus shutdown, recent growth appears to have little to do with valuations or improving economic data. On Monday, the CSI 300 jumped almost 6 per cent after a state-run newspaper urged people to join a ‘healthy bull market’. The Chinese authorities have previously used the media to boost stock market returns but the results often prove short-lived.
Boohoo: Counting the Cost of Governance Failures
Away from the cautious markets, it has been a dramatic few weeks for online fashion retailer Boohoo. After 18 months of rapid share price growth, its shares fell 39 per cent in three days after allegations of worker exploitation. Just a few weeks ago the company was celebrating its recent acquisitions and rising online sales as longer-established rivals struggle with lockdown and declining high street sales.
Instead of looking to further growth, the company has spent the week trying to salvage its reputation after allegations of suppliers illegally underpaying workers and one of its factories was linked to the coronavirus outbreak in Leicester. Several retailers have withdrawn Boohoo’s clothes while the company reviews its supply chain. Several ethical funds, including ASI UK Ethical Equity and Premier Ethical, are reviewing their investments. However, Boohoo’s share price had stabilised by the end of the week and Jupiter Asset Management, the company’s biggest independent shareholder, has taken advantage of the drop in share price to increase its stake.