Market Commentary – July 2020
By Neil Worsley, Investment Strategist
Following a dire 1st quarter of 2020, financial markets staged a strong rebound in the latest quarter as glimpses of a reawakening global economy begin to emerge.
In sterling terms, equity markets posted strong gains in the 2nd quarter of 2020, with US equities +17%, Continental Europe +20%, Japan and the UK up around 10%. The UK market has lagged other global equities for some time now, especially as the major indices here are heavily weighted towards value and cyclical sectors. As the Brexit fog clears and with any sustained pandemic recovery this situation could well change for the better. On the reverse side, the standout sector was global technology, which rose around 30% as investors flocked into an area of the market which saw benefits from the change in social behaviour and where there was more certainty and clarity on profits. The bond markets were a little quieter, posting small gains, but of course government bonds saw more positive moves as the Virus outbreak began in February and March.
While the Covid 19 pandemic is by no means over and will leave its mark on human activity for the foreseeable future, there are signs in Asia and Europe that the slow process of ‘normalisation’ has begun and economic activity is starting to materialise. However, while we are likely to see a strong economic rebound over the coming months, this will be from an extremely low base and any sustained recovery to previous economic comparisons is likely to take a number of years, especially in the developed economies. The recovery effort will also require continued financial assistance from governments and central banks which have already committed trillions of dollars to the cause and will probably need to commit many more before the worst is over. Although these are eye watering numbers, with the extremely low levels of interest rates, these are affordable, for now at least. The bigger problem will appear if and when inflation and therefore, interest rates begin to rise and the interest burden then becomes an issue: But for now, this is some time away and it is worth mentioning that Japan, for over 40 years and Europe for 10 years have been trying to drive spending and inflation higher to help with economic recovery, without success.
Aside from Covid 19, other issues which are likely to affect financial markets over coming months are the US elections, Brexit and China, with Hong Kong returning to the fore, the US trade deal not yet resolved and a possible economic penalty which the global community may impose as a result of the Covid crisis. While all these have the potential to cause serious economic repercussions, there is likely to be little appetite for triggering further major financial disruption at least until we see a more stable backdrop. The more unpredictable element is President Trump who does not have time on his hands to wait for a better environment and he may decide to pursue his own agenda in an attempt to get re-elected.
In the meantime, we can probably expect even more quantitative easing and further initiatives and financial help from governments in an attempt to further kick-start the economy. The great unknowns are how people will react and behave once the lockdown is eased and whether the increased human activity will cause further serious spikes in the virus outbreak. Until these factors have been established it is difficult to predict the speed of the economic recovery and therefore, the pace of revival of financial markets but, barring any major setback, then we may have seen the bottom of the present cycle, even if the future is clouded.
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