Commentary on July-August 2020
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Share prices continued to ebb and flow with the latest Covid-19 developments, falling as fresh outbreaks triggered isolated lockdowns and widespread restrictions on travel, but then rising on optimism of progress in finding a vaccine. From the end of June until mid-August equities were up by between 1-4% (in sterling terms) with the exception of Japanese shares which lost around 2%. These moves reflected a generally down month in July on concerns over a fresh Covid-19 outbreak across the US Sun Belt states, but improved sentiment driving riskier investments higher in early August.
July saw the continued fall in real yields (yields after adjusting for inflation) to record lows with the real yield on long-dated US treasuries turning negative for the first time. This resulted from central bank buying driving bond yields to record lows despite (some) investors’ concerns about a future rise in inflation. The fall in real yields contributed towards significant moves in two other markets; the price of gold soared to a new high in August and is now up 26% this year, and the US dollar fell to its lowest since May 2018, 10% below March’s high.
Alarming headlines across the media portrayed the ‘Armageddon’ scenario of the UK economy ‘falling off a cliff’ with the biggest collapse in growth on record. We wouldn’t want to make light of what was undoubtably an horrific number, but would throw in a couple of comments: Firstly, what were we to expect when the government shut-down the economy; if it’s closed then it can’t grow! Secondly, if we break down the eye-watering second quarter fall in GDP of 20.4% by month then it shows a fall of 20% in April followed by rises of 2.4% and 8.7% for May and June respectively. So, once lockdown restrictions began to be lifted the economy started to grow again.
Economic data generally continued to improve on earlier catastrophic levels; this was also the case during the US corporate reporting season where 85% of the top companies beat analysts’ gloomy forecasts. However, we maintain that all data should be treated with extreme caution for many months ahead. For example, US second quarter GDP was reported as showing a fall of 32%; this was because the US convention is to show an annualised number and annualising the worst quarter in history is just plain ridiculous!
With the US aid package for the unemployed ending in July, the only thing that Congress could agree on was its opposition to President Trump’s executive orders to extend the aid until December (just after the US election!). At the time of writing talks have broken down with both parties blaming the other’s intransigence.
On the face of it, investors appear to be coping fairly well with the economic consequences of the pandemic, though having central bank buying as a back-stop does muddy the waters. In true investment fashion expectations have been set so low that the majority of data, both economic and corporate has pleased; reaction to further outbreaks has been contained within a trading range.
However, as we’ve said previously, such was the collapse in activity that any re-opening should have produced positive changes; the challenge will be going forward. Furlough schemes, in their various forms, have undoubtably sheltered many and, in the case of America, offered a greater benefit to some than actually working. As things stand, the UK’s scheme is already tapering off, with employers now being asked to contribute, and this is forcing an evaluation of whether to keep employees on the payroll or cut numbers now. Part of the reason for the stand-off in the US is that to continue offering aid at the current level provides a disincentive to return to work.
During lockdown, many furloughed workers have been financially better off; this, plus the lack of holidays has seen spending channelled into house improvements and online purchases. If this is replaced by the fear of unemployment then spending could be curtailed.
We think that the key to future growth is confidence-in health and economic well-being- and that this is linked to finding a successful vaccine. But this gets tricky; recent surveys show that despite suggestions that a successful product isn’t far off (we’re discounting Putin’s claimed success) there’s scepticism amongst the public over the short time-frame of the trials, compared to previous vaccines. This might translate into a marked reluctance to be first in line for the jab.
We expect markets to remain unsettled but, unless the news worsens markedly, for central bank buying, and the search for income, to offer support.
How are we currently positioned?
We see no reason to change our view that the risk remains of markets selling off again and that better opportunities may present themselves. With that in mind we continue to hold considerable cash levels ready to deploy and have been busy looking at potential new funds.
Our portfolios diversify risk by investing in a wide range of assets using actively managed funds with sound investment processes. Some examples of these ‘alternative’ assets are funds invested in gold & silver, infrastructure, agriculture and absolute return strategies.
Very best wishes, stay well.