I ADMIT to being pleasantly surprised by the strength of economic data released in recent months as economies have re-opened; the UK’s 3.1% year on year rise in non-fuel related retail sales during July is just one example.

Another would be the rude health of the US housing market where existing homes sales are running at a rate not seen since before the Great Financial Crisis and the market overall, as captured by the National Association of Home Builders index, stands at levels not breached since data began (1985).

Some of this reflects pent-up demand and is inevitably temporary – doubtless higher UK retail buying is tourist money that would otherwise have been spent on the Costas. Some of it will also be structural. Anecdotal reports point to strong demand for housing skewed to properties more appropriate for working from home (never have gardens been so prized!) All of this is supported by unprecedentedly low borrowing costs.

Various commentators have drawn comparisons between the current health shock with the Asian and Hong Kong flus of 1957 and 1968/9. Both killed more than four million people worldwide, with 80,000 deaths in the UK attributed to the latter and thus far, were substantially more deadly than Covid. In neither episode did the UK, nor anywhere else, move into nationwide lock-down. There may be several reasons for this. Today’s social media undoubtedly adds a visibility hitherto absent with the potential to bend Government policy against the collective good, but perhaps most significantly, lockdown 50 years ago would have been too expensive.

Governments today are able to borrow inordinate sums at almost zero cost; not so before. In 1968, longer dated Gilt yields were upwards of 8% while in the US, long term bond yields were 7%. We have come to see quantitative easing (large scale asset purchases by central banks) as commonplace; fifty years ago, investors would probably have judged it madness. This is especially true in the UK where the Pound was regularly succumbing to crises of confidence and public finances were in a dire state. Today, UK government debt has reached £2 trillion and few seem to care…yet.

There are no such obstacles today. Persistent inflation undershoots and lessons from Japan have fostered the belief that there is, in practice, no limit to money printing and, increasingly, Government borrowing. Indeed, markets are actively rewarding countries that are relaxing their fiscal policies. At the same time, all the major central banks are close to concluding policy reviews that look set to institutionalise a degree of inflation indulgence that we have never known. The risk with Quantitative Easing was always that it would eventually be hijacked by politicians in a manner that sees central banks lose their operational independence; so it is has proved. Extra-ordinary monetary policies have been exploited to fund a collective paralysis. The danger is that once you start to treat your cash/currency with blatant disregard, then ultimately others judge it to be worthless – just ask anyone from Venezuela. This might seem a problem for tomorrow but it should not be forgotten.

In the meantime, investors have to negotiate the slow re-opening of economies – ratings agency Jefferies judges the UK and Eurozone to be currently operating at two-thirds of pre-Covid levels, while hoping for a successful speedy conclusion to the Brexit trade negotiations, a conclusive US presidential result and that the surge in unemployment proves temporary. Globally, equity markets are standing on premium valuation multiples with a positive medium-term earnings outlook offsetting the second quarter of the year’s earnings crunch. Some judge that equity markets are priced for perfection and this isn’t hard to understand but, the bull’s challenge, what else is there? Bond markets, government or corporate, offer meagre returns and have merit only as a defence against another equity slump. Property prices may look cheap but this is a market facing structural change.

The latest consensus growth forecasts suggest, US and Germany apart, that it will be 2023 at least before the major economies recoup the output lost to Covid. This is a long time for equity markets to survive untouched by doubt – whether by worries of currency debasement, of earnings weakness or geo-political strife that hard times always bring. Looking ahead and with policymakers increasingly ‘all in’, it will take more than the occasional upcoming equinoctial gale to cause problems but turbulence, when it hits, will be painful. The market spasms of the fourth quarter 2018 and this Spring both surprised in their sharpest and severity; this is another ‘new normal’. The sun may currently be shining now but hang onto your hat.

Olaf van den Heuvel, Chief Investment Officer NL, Aegon Asset Management