Market Commentary - June 4th 2020
The rhetoric in May centred on the revival of economies around the world, helping drive optimism in markets. Last month saw a continuation of April’s rally, albeit at a steadier pace, with the MSCI World Index gaining 4.1%. This, however, was not the only hand at play, with geopolitical ructions rising to the surface, exacerbating differences between countries at a time when, conversely, there has been a shared experience of pandemic.
Trends that emerged defiant from the March nadir continued, with developed markets outperforming emerging counterparts and the technology sector outpacing all else. The month ended on a distinctly cyclical note, with value-oriented assets strengthening and increasing market commentary around the potential for a rotation in market leadership.
Many analysts and economists have struggled to explain the market’s rally, with such an extreme disconnect regarding equity valuations and the pandemic, trade tensions, riots, mass unemployment, inequality and falling GDP. Economic output has suffered a stunning blow, yet next year’s earnings expectations mean equity valuations are close to highs reached at the peak of the dot-com bubble. Market participants are basing expectations on a strong recovery ahead despite intense uncertainties.
Risks to equity markets’ strength focus around a second wave of infections but, as alluded to above, increasing political friction is a growing hazard. Tension between the US and China has flared up once more, having initially been stoked by President Trump’s accusation that China is to blame for the Covid-19 outbreak. With the economy flagging and unemployment surging, some have been quick to highlight that Trump’s move aims to unify a divided America in light of the upcoming election. With international pressures building, Trump now also faces intra-national issues; civil unrest of the kind not seen since the assassination of Martin Luther King in 1968.
The labour market continues to be watched keenly for signs of economic restoration. In the US, the last week in May saw the total jobless claims number rise to 41m, although continuing claims started to recede, highlighting individuals moving back into the workforce. In the UK, jobless claims rose more in April than in 2008/9 combined. Vacancies more than halved, signalling a 5%, or 1.7million, reduction in jobs. We could well be past the peak of job losses in developed markets, but they will likely continue despite economic reopening.
Stimulus and monetary support maintain momentum, with policymakers now turning their attention to the recovery phase. Europe put forward its proposal for the ‘Next Generation EU’ fund at the end of May, emphasising both a collegiate approach and a focus on environmental and social factors to promote a sustainable recovery and push towards climate neutrality.
The pandemic has also shone a light on the role good companies play within society and it reminds us of the interlaced affairs between employees, customers, suppliers and the wider community. Strong management teams are aware of the importance of ESG, as each letter in the acronym has been catalysed in differing ways and at different points in time. We continue to monitor and explore the ways our investable universe could develop through this current crisis and remain flexible to adapt.
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