12 August 2020

Where are the safe havens?

The news that BP, one of the income paying stalwarts of the FTSE 100, had announced it was halving its payout to shareholders as a consequence of the fall in the oil price reinforces the comments I made two weeks ago that dividends are under threat.


Oil naturally suffered from the drop in global economic activity, though it is well above the levels to which it plunged earlier in the year, but there are plenty of other pressures on companies that could lead them to conserve cash. Indeed, the extent to which the pandemic has impacted countries’ economic performance continues to make grim reading.

We learned recently that Spain’s Gross Domestic Product had shrunk by 18.5% in the second quarter of 2020. It had already contracted by over 5% in the first quarter, so the pain the country is suffering following the collapse in tourism is very real indeed. The Spanish experience was the worst in Europe, which overall saw a decline of around 12% in GDP. Germany’s experience was somewhat better, registering a 10% contraction. The news that inventories there have started to fall is encouraging and there are other signs of an improvement, with forward looking economic indicators turning up.

We are right in the middle of the reporting season for companies declaring their second quarter or first half year profits. Results have been mixed, but with relatively few surprises, given the problems faced by a variety of businesses. Markets have held up remarkably well in the circumstances, the US proving to be particularly resilient, given the near one third decline in its economy during the second quarter and an apparently worsening Covid-19 situation. As we approach the Presidential election later this year, I can’t help but wonder if this apparent confidence can hold up.

So, as we enter high summer, the economic effect of the pandemic continues to dominate investor sentiment. Gold has experienced a resurgence of support, with the price topping $2000 for the first time. Of course, a weaker dollar has helped, though gold’s safe haven status does seem to have come in to play in no small measure. Elsewhere, with interest rates at near rock bottom levels, it is perhaps less surprising that shares should remain in demand. But more high-profile dividend cuts could undermine this fragile confidence. Even so, learning that we have a proper vaccine could turn things around in a positive fashion. Let’s hope we get one soon.


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