MARKET COMMENTARY – JULY 2020

Global equity markets generally made gains in June, further recovering from their March lows with the tremendous levels of stimulus provided by central banks and governments around the world continuing to provide support. US and UK government bond returns were flat over the period as investors’ appetite for risk assets increased, although year to date traditional safe haven assets such as governments bonds have performed strongly, with UK government bonds (gilts) up 8.31% and gold up near to 18%.

US equities rallied further in June (S&P500 +1.56%) in spite of the increase in the number of new infections leading to a rolling back of lockdown restrictions in several states. The second quarter return was the strongest since 1987 with the S&P500 gaining in excess of 26%.  As the economy begins to reopen, economic data has shown signs of a sharp rebound with retail sales rising 17% over the month in May, albeit down year on year.  The US economy remains dependent on the consumer and support has been made available in the form of direct payments to households and unusually generous unemployment benefits. There is risk however from the premature withdrawal of stimulus measures, before the virus is fully contained and labour markets have recovered.  The enhanced unemployment benefits, due to be withdrawn at the end of July, will present many households with a significant reduction in their income in the latter part of the year if employment levels do not recovery rapidly.  The Federal Reserve has demonstrated its commitment to maintain stimulus measures and to keep corporate and government borrowing costs low in an attempt to avoid the worst case scenario that the pandemic could develop into a liquidity crisis.

In the UK, equity markets struggled to make headway over the month, though overall the FTSE All Share was up 14.46% in the second quarter of 2020 having fallen by c. -28% in the first. UK gross domestic product suffered a decline of 2.2% in the first quarter of 2020. The Bank of England increased its quantitative easing programme by a further £100 billion, helping to keep borrowing costs low.  The government has announced that companies will have to contribute to the cost of supporting furloughed employees from August with the scheme set to expire at the end of October.  Unfortunately it is inevitable that there will be an increase in UK unemployment, particularly in sectors where there has been a greater impact from COVID-19 such as retail and hospitality.

New virus infections in the UK have fallen to much lower levels, albeit not as seen in Australasia and parts of Asia, and the economy is advancing on the path of reopening. In the absence of a vaccine, economic activity will need to continue with the virus present, but controlled by measures such as contact tracing and if necessary localised lockdowns such as that imposed recently in Leicester.

Although limited outbreaks continue, Europe has generally seen good progress in suppressing the virus and reopening it’s economy, France for example now having removed most restrictions. The Eurostoxx equity index returned 3.98% over the month.  Political risks remain though with trade tensions between the US and Europe rising and a post Brexit trade deal still unresolved.  Importantly, the European Union has taken steps towards reducing the risk of another politically motivated debt crisis with the proposed €750bn recovery fund representing a unified approach aimed at providing support to those countries worst affected by the pandemic, including Italy and Spain, with potentially large amounts of funding from Germany and France.

Chinese equities also rose in value over the month as impressive manufacturing and services growth continued.  This has been aided by the People’s Bank of China’s reduction in lending and refinancing rates geared to small business and farmers. Rising political tensions with the west, the ongoing US trade dispute and higher unemployment may mean that economic recovery is not smooth.  Elsewhere, emerging market equities also made solid gains in spite of rising infection statistics in countries such as India and Brazil where the virus is not under control.  The MSCI Emerging Markets Index gained 7.50% over the month.

Although increases have not been uniform across all sectors, markets have sustained their rally as continued fiscal and monetary stimulus has backed up the easing of economic restrictions. The focus remains on how effective measures will be in preventing a major second wave of infections, in the absence of vaccine.  The actions of governments and central banks have laid the groundwork for a rapid recovery and that support looks set to stay.  Risks will certainly remain however and an active and flexible approach to investing remains important.

Performance to 2 July 2020

 *June 2020