Market Commentary - June 20th 2020
Investor sentiment has shifted back in favour of more defensive and economically insulated investments. Positive sentiment has waned in the last two weeks; as a growing consensus on the likelihood of a sharp rebound in economic activity has given way to a re-emergence of Covid-19 cases across the globe, particularly in the US. This has provided a reality check for markets and has raised question marks over a quick economic recovery markets are currently pricing in.
Market sentiment has also been affected by the ongoing rhetoric which has emerged from the White House with regard to US / China relations as well as those with the EU. The regulation of US technology companies in the EU has attracted significant investor attention. Voting polls suggest an increasing likelihood of a change in Presidential leadership in the coming election. This is something we will monitor closely in the run up to November.
Recent economic data has broadly continued to support hopes of an economic recovery; manufacturing PMIs in Europe and the US showed sequential improvement, while higher US durable goods orders (+16% from April) and lower inventories continue to evidence a return of demand. US unemployment data continues to build an element of macroeconomic risk, as a further 1.5m individuals applied for jobless benefits in the past week. The IMF revised its global growth expectations for 2020 to -4.9% and the Federal Reserve moved to limit US bank dividend pay-outs and share buybacks in an effort to shore up reserve capital. The Bank of England subtly shifted its stance to favour a reversal of asset purchases over a normalisation of interest rates, as the central bank looks to build an economic exit strategy.
Elsewhere, the NASDAQ index (which includes mostly technology companies) has achieved circa 15.5% outperformance this year (vs the S&P 500). As the number of Covid-19 cases continue to rise in the US, haven assets have done well; the US 10-year Treasury yield has fallen (and so value of bonds has risen), while the price of gold sits at an 8-year high, up by 16.3% in the year to date.
We remain positioned in high conviction ideas, while maintaining relatively elevated cash balances. We remain comfortable with the exposures of our protective assets, with higher cash balances an acknowledgment of the risks which surround equity valuations and the outlook for short-term earnings.
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