Coronavirus (COVID-19) Update – 10th July 2020
Markets continued to make progress during the past fortnight with notable outperformance by Asia and Emerging Market indices. Since the lows on 23rd March most major equity markets are up around 30% in sterling terms. Indeed a sterling-based investor who only looked at half-yearly valuations would be perhaps be a little disappointed by the low single digit returns generated by the MSCI World index and S&P 500 for the first half of the year but would have missed the roller coaster ride that saw both indices down over 25% at one point. Other markets such as Europe and Japan have declined by a few percent and it is only the UK stock market, beset by fears surrounding Brexit and lacking any large technology companies, which has continued to languish with a return of -17.51% for the FTSE All-Share over the first half of the year.
By contrast that same investor might perhaps be surprised to see that US Treasuries have generated an astonishing return of almost 17% in sterling terms reflecting both the strength of the dollar versus sterling and a flight to quality amidst fears of a deflationary shock brought about the Covid induced economic standstill. Interest rates had less far to fall in the UK but gilts are up almost 9% despite record issuance.
(Source: FTSE Actuaries UK Conventional Gilts All Stocks, ICE BofA US Treasury; FE Analytics, as at 30th June 2020)
So what is our outlook for the second half of the year?
At the beginning of 2020 we were feeling relatively confident. Unemployment was at record lows in the US and UK, the Conservatives had won a resounding victory in the General Election, US-China trade negotiations had stabilised, inflation was under control, central bank policy was accommodative making a global recession seem unlikely and then Covid hit. Much has been made of the shape of the recovery and there are signs that once consumers are released from lockdown then the urge to go out and spend is strong but the V-shaped recovery in stock markets (with the exception of the UK) seems somewhat at odds with the degree of ongoing economic uncertainty. And if we look closer at the composition of the stock market recovery then there are some signs that the picture is not as rosy as our Rip Van Winkle investor who has been asleep for the past six months might assume.
We have talked quite a lot about growth versus value investing in these updates and had been hopeful towards the end of May and in early June that value shares might be “taking up the baton to drive markets higher from here, despite them looking rather expensive in aggregate.” In fact, what has happened, at least in a global context is that growth has resumed its outperformance of value. One interpretation is that investors do not believe that an economic recovery is underway but that they are continuing to focus on those sectors which are perceived to be more defensive.
John Authers of Bloomberg has been following a “Coronavirus Fear” index which charts the relative performance of the S&P 500 food retailing sub-index, relative to the hotels and cruise lines sub-index (in other words companies that are most directly affected by the virus). Up until June 8th as optimism about the re-opening of the US economy increased the index steadily declined but since then food retailers have started outperforming hotels again. Meanwhile, the US market is being ever more dominated by the so-called FAANG stocks and the share of the five biggest (Facebook, Apple, Microsoft, Amazon and Google’s holding company Alphabet) in the S&P 500 has risen to 22.5% from 16.8% at the start of the year.
Interestingly in the UK, where technology does not feature to the same degree, the situation has been rather different with Man GLG Undervalued Assets (+8.16%) faring better than Liontrust UK Special Situations (+0.50%) from 22nd May to 9th July. Perhaps the cheapest parts of the UK market which has become the most shunned of all major equity markets, riven by investor outflows, are now offering a level of value which cannot be ignored regardless of the path of the economy.
Source: FE Analytics, Total Return, GBP
It is always impossible to predict the path of the market on a six-month view but the prospects for the second half of this year seem particularly opaque. Now more than ever, investors should maintain portfolios that are diversified across different asset classes, regions and styles of investing.
We hope that all our clients stay safe and well. Please do get in touch if there is anything you would like to discuss further.
10th July 2020
RiverPeak Wealth Limited