Global Markets to 21st June 2020
- Global equity markets experience another mixed week as they continue to be buffeted by Covid-19 and economic data
- Weaker predicted global economic data for the second quarter could mean that the bottom has been reached
- Further central bank stimulus is announced by the Bank of England and the US Federal Reserve Bank
- It should be remembered that many of the world’s leading companies emerged during times of financial crisis
- The NASDAQ hits a new all-time high – although the pandemic has created the most severe financial crisis since the Great Depression
- Early signs suggest that the bull market on Wall Street is broadening out
Global Market Summary
There were several choppy trading sessions on the global equity markets this week as fears of a second Covid-19 wave created nervousness among traders and investors.
However, some stronger US retail data for May and additional stimulus packages provided by the central banks helped sustain the markets, leaving them markedly higher over the week. US online service companies and technology stocks fared well throughout the week and were in demand, with interest in these being driven by increasing numbers of people working remotely under the lockdown.
In the US, Arizona, Florida, California, South Carolina and Texas have all unfortunately reported more outbreaks of Covid-19. China has also seen a cluster of new cases, but according to Wu Zunyou, the chief epidemiologist of the Chinese Centre for Disease Control and Prevention, the outbreak has been brought under control.
The majority of these infections have been traced back to Xinfadi, a major wholesale produce market located on the city outskirts, about 9 miles southwest of Tiananmen Square at the centre of Beijing. The Chinese authorities, however, have strongly suggested that this recent outbreak involved a European strain of the virus that was contained in frozen food imports.
The worst countries affected, however, are India (which has recently reported its highest number of daily cases) and Brazil, which is fast approaching the one million infection milestone and currently has the second-highest fatality rate behind the US. Argentina, Croatia and Iran have also all recorded increases in confirmed cases.
In the UK, the chief medical officer has lowered the Covid-19 alert level from four to three, meaning that the virus is still in general circulation, but restrictions can gradually start to be reduced. Although there has been a steady decrease in cases in England, Wales, Scotland and Northern Ireland, this does not mean that the pandemic is over: localised outbreaks are still likely to continue to occur.
The shock to global GDP – likely to be in the region of 6% to 10% for most of the world’s most advanced economies – will further affect corporate profitability. Indeed, many companies are already experiencing a huge decline in earnings and are uncertain about the recovery.
This creates a backdrop of uncertainty: less revenue means less profit. And less profit means less money to be distributed among shareholders. Similarly, lower profits impacts the financing of investment projects and the ability to service debt – hitting both shareholders and investors.
But central bank stimulus has been very much in evidence. Last week, the Bank of England announced it would be pumping a further £100 billion into the UK economy. And European Union leaders began to approve the new Pandemic Emergency Purchase Programme stimulus package that ECB president Christine Lagarde announced the previous week.
In the US, the Federal Reserve Bank announced its intention to engage in a direct corporate bond-buying programme, rather than exchange-traded funds. Meanwhile, the Trump administration is preparing a US$1 trillion stimulus package focused on infrastructure as part of its drive to relaunch the economy.
For now, these stimulus packages are positively impacting both the bond and equity markets – a trend that has been in evidence for the last decade or so. However, there are a few challenges that the markets will need to overcome over the next six months, and whether or not they succeed will depend very much on consumer demand. Recent optimism has propelled the global equity markets to levels that many professional investors thought unachievable back in March. Some short-term caution therefore needs to be exercised.
But we know that bull markets are stronger and last longer than short-term bear markets which are destructive and leave carnage – such as the 2008 financial crisis and this year’s pandemic.
It’s important to bear in mind that many of the world’s leading companies were created during periods of crisis. And historically others that had been around for decades – but were weak as they entered a watershed period – ended up becoming insolvent.
Three years after the end of the Second World War in 1948, just as the global economic recovery was getting under way, McDonald’s emerged. Some 14 years later during the 1962 flash crash, Walmart appeared.
Similarly, the stagflation years of the 1970s saw the likes of Microsoft, Starbucks and Apple starting up. Amazon was created in the early 1990s, while Alphabet (Google) and Netflix were founded towards the end of that decade.
This year, in the shadow of coronavirus, a Covid-19 index has emerged featuring names such as Zoom Video, Slack, Salesforce, Nvidia, Ring Central, Twilio and Livongo Health. These are all getting a tremendous amount of media coverage, as are a number of disruptive technologies and research areas: artificial intelligence, the Internet of Things, Space Colonisation, 3D printing, medical innovation, high-speed travel and blockchain technology are now all at the forefront of public awareness.
Admittedly, the above companies are all US corporations with a focus on technology or disruption. But they have all helped propel indices such as the S&P 500 and NASDAQ back to levels close to their all-time highs, or indeed to new ones. This is no small feat when you consider that Covid-19 has created the biggest global economic crisis since the Great Depression of the 1930s.
It is important to remember that it is the recent aggressive rally in the prices of some of these technology companies that has propelled them skywards, and that the NASDAQ 100 index is now dominated by some of the most profitable companies in the world. It is currently trading at 28-times expected earnings, but back in 1999 it was trading at 80-times earnings – which puts the recent rise into some sort of perspective.
While the global economic backdrop is likely to remain weak throughout this quarter and the data over the coming weeks looks set to be rather uninspiring, there are some early signs that the new bull market is now broadening out beyond technology and into more economically sensitive sectors. But the long-term effects of Covid-19 mean that we have entered a new paradigm: global investors and consumers are now more likely to focus on the new world of disruptive businesses – whether they are at work or at play.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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