Commentary on June 2020
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Volatility picked up in June as contrasting news flows pulled sentiment first one way then the other. Daily stock-market moves in the 100s were common place but with most indices ultimately ending the month higher. Asian and emerging markets led the way with gains of around 7%; European shares rose a healthy 4% but the US and UK were more subdued, mustering only 1-2%.
The fall in bond yields continued, driven by further central bank initiatives to support prices, allowing the UK government to issue 5-year bonds on a negative yield! Globally, the driving force was central bank commitments to buy vast quantities of bonds, including corporate and some high-yield (junk) bonds. In addition, the belief that some central banks were unofficially committed to controlling (suppressing) yields on longer-dated bonds kept investors keen.
Initially, confidence that the fall in new Covid-19 cases allowed for the gradual easing of lockdown buoyed stock-markets; Europe, in particular, demonstrated a rise in mobility data without a consequent spike in new cases. But in late June/ early July a rapid increase in cases across the US Sun Belt states, together with isolated outbreaks in several countries, resulted in a more cautious tone.
Economic data tended to suggest that we had seen the worst and some numbers surprised to the upside. Generally, the Purchasing Managers Indices showed a strong bounce to near the neutral growth level of 50, and employment data from the United States was far stronger than forecast. In the UK, despite further government initiatives, jobs were lost across the travel and retail sectors.
Trade tensions, mostly involving the United States escalated. China provided an easy target when it provoked widespread condemnation in passing the National Security law on Hong Kong, aimed at limiting subversive activities and foreign intervention in Hong Kong affairs. The US responded by suggesting that if Hong Kong were to lose its unique independence then it would lose certain special trade privileges currently bestowed on it. President Trump re-ignited the simmering rift with Europe by threatening to impose tariffs on $3.1bn of European products. In the background, the deadline for requesting an extension to the Brexit transition quietly passed.
The rally in risk assets has been fuelled by a mix of fiscal and monetary stimulus combined with the reopening of economies. Central banks have communicated as clearly as possible that monetary support is here to stay and governments, for now, look prepared to increase fiscal stimulus as and when they feel it necessary.
The worst-case scenario of the Covid-19 crisis may have been averted but that shouldn’t mean that the path to economic recovery is clear. Investors are factoring in further waves of the virus but assume this will be met with isolated regional measures. A more widespread resurgence culminating in a repeat of the original lockdown is not envisaged and therefore not allowed for in market valuations.
Economic data has been both worse and, more recently, better than expected, but all that really shows us is the futility of trying to predict an outcome when we have no historic precedent for a deliberate global economic shutdown followed by monetary and fiscal stimulus in the trillions of dollars. There may be some clarity over the next few weeks, with the release of US corporate earnings and, more importantly, guidance on future prospects.
We can be pretty certain that, despite multiple government aid packages, many businesses won’t survive. The UK Chancellor’s most recent multi-billion package, aimed at rejuvenating the economy, was closely followed by the announcement of store closures and consequent job losses by Boots and John Lewis- Airbus, EasyJet, Royal Mail, Arcadia and Upper Crust were just some of the other high-profile names forced into laying off staff.
Political risks remain, with the US election fast approaching, tensions between China and the rest of the world escalating and Brexit still unresolved. The world has become used to, possibly even complacent about, the brinkmanship of geo-politics. But despite the Covid-19 infection rate falling in some parts of the world, the virus has not been fully contained, and an approved vaccine still seems some way off. Whilst this unpredictable risk remains, we expect markets to remain unsettled.
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.
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.