Markets Surge in Q2 2020
The second quarter of 2020 has been incredible for investment markets, with impressive gains for both equities and bonds on the back of unprecedented levels of government and central bank support and investors’ conclusion that the worst of the covid-19 pandemic is over.
The Financial Times has dubbed the rally in investment markets since March the ‘Terminator’ rally, like Arnold Schwarzenegger’s cyborg assassin, which nothing seems able to stop it. Others have drawn comparisons with the ‘irrational exuberance’ highlighted by Alan Greenspan in the late 1990s as bubbles developed in global markets.
US Federal Reserve Boosts Markets
The economic recovery is owed in large part to Chair of the US Federal Reserve, Jerome Powell’s speech in April, where he echoed Mario Draghi of the European Central Bank in the depths of the 2008 global financial crisis. Powell told Congress that they should do whatever it takes to keep the economy from collapse. The Fed has injected trillions of dollars of support into markets.
Global equity markets rose over 20% over the quarter, with the US leading the way with its best gain since 1998 of 26%. This surge has been largely driven by the technology-heavy NASDAQ market with the large companies, such as Amazon, Microsoft, Google, Apple and Facebook trailblazing.
Elsewhere, Japan bounced 23%, continental Europe and emerging markets 22%, with the UK at the back of the pack up 13%.
Sterling weakness has provided a helpful tailwind for overseas investments with a decrease of more than 5% since the start of year against the US dollar, Euro, Yen and Swiss Franc.
Since the start of the year allowing for the period of the coronavirus pandemic, China has been the best performing region up 10% with global equities now showing a positive overall return; however, it is notable that the UK FTSE-100 has significantly underperformed with a decline of 17% year-to-date.
Bonds Continue to Perform
In respect of cautious assets, government and corporate bonds have enjoyed another good quarter, particularly index-linked gilts with a gain of over 8% as investor demand for inflation-protection has surged. Global corporate bonds have also rallied as interest rates have continued to fall and investors search for income. In addition, bonds have benefited from huge purchases by central banks as part of global efforts to stimulate the economy.
Oil and Gold in Demand
The oil price has bounced back from $25 to finish the quarter at over $40 a barrel reflecting an improved economic outlook as well as a reduction in supply. Gold too has continued its rally to close at an 8-year high as a result of investors seeking inflation-protection and diversification, as well as its attraction as the ultimate safe haven.
Inflated Market Valuations
There is much talk of the ‘FOMO’ trade, the fear of missing out. This momentum upwards has drawn investors in, almost regardless of valuations and the wider economic picture. The valuation of the US market is now almost 30, double the long-term average. As such, 80% of professional fund managers have recently voted in a poll that markets are over-valued.
Gloomy Economic Outlook
Moreover, buoyant markets are at odds with gloomy economic forecasts. The IMF has cut its global growth forecasts for this year and 2021 in the wake of the coronavirus pandemic. It now predicts a fall of 5% globally in 2020, with a 10% drop in UK growth; amongst major economies, only China is likely to escape a recession. Such pessimism is based on a severe reduction in consumer spending, the ongoing US-China trade dispute and high levels of unemployment leading to long-term damage to the global economy. Productivity and business efficiency are also likely to fall as businesses need to implement health and safety measures to protection customers and staff.
Record Low Interest Rates
Low bond yields reflect the enormous investor appetite for secure assets, with 10-year German Bunds now trading with an interest rate of -0.43%. Governments have taken advantage of interest rates at record low levels to raise huge amounts of new money by issuing new bonds. Austria has recently raised €2bn by issuing a century bond due to mature in 2120 with an interest rate of just 0.88%.
Covid-19 Cases over 10 million
There have now been over 10 million confirmed cases of covid-19 around the world and over 500,000 deaths, of which the US alone makes up around a quarter of these figures. Although it appears the first wave of the virus has been brought under control with lockdowns being eased almost everywhere, there is now increasing concern with regard to a second wave. Germany has seen a worrying outbreak of the virus at an abattoir and clusters of new cases have emerged in China with local lockdowns being implemented. In Brazil and Mexico, the situation remains dangerous and the US and Australia also have significant ongoing infections in specific areas, such as California, Arizona, Florida and Melbourne respectively.
In the UK, the lockdown is being gradually eased with the expectation that hospitality and leisure sectors will re-open from 4 July. Together, with a potential extension to ‘social bubbles’, this means that people will increasingly be mixing significantly more and travelling further afield, inevitably raising the stakes for the ‘Reproduction’ (R) rate increasing again above 1, where the virus spreads. Indeed, a local lockdown has been implemented in Leicester recently to deal with a significant spike in covid-19 infections.
The economic cost of the lockdown is increasingly in the spotlight. There has been speculation that the Chancellor, Rishi Sunak, may potentially initiate a temporary cut in VAT, but with deferred tax rises and cuts to public spending expected in his Autumn Budget.
Short-Term Investment Uncertainty
The investment outlook is highly uncertain in the short-term, with inevitable volatility with virus spikes, a possible second wave and economic pain as government support is gradually withdrawn. Political risks abound, including the forthcoming US elections, US-China relations, Hong Kong instability and Brexit.
Central Banks Driving Markets
Markets have been driven in recent months by exceptional central bank largesse not company performance. Such economic engineering, whilst it has delivered temporary stability, is dangerous as it risks asset price bubbles, excessive debt and a toxic pick-up in inflation.
The challenge for authorities around the world is to reduce our dependence on the radical financial solutions now in place and ‘normalise’ the global economy over the economic cycle. Given time, the world will recover from covid-19, especially if an effective vaccine becomes available.
New Technologies for Global Growth
Looking further ahead, I expect markets to make positive progress as new technologies drive global growth and deliver attractive profits for investors. In particular, there is a dramatic growth in sustainable technologies to benefit both the environment and drive efficiencies for consumers and business. This includes renewable energy, but the remit is much wider as we move to a low carbon economy.
The digital economy is growing rapidly too, both in terms of data and our use of the internet for almost every aspect of our daily lives. Many companies with a bright future are grasping the opportunities which are emerging from the current crisis and developing new business models, disrupting the status quo. It is clear that some of the business sectors which prospered in the past are likely to be eclipsed as the pace of change quickens and patterns for living and working evolve. With the right focus, the future of investment is bright.
Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500, info@clients@SeabrookClark.co.uk