Global Markets to 12th July 2020
- Global equity and bond markets have a good week as governments across the world continue to ease the lockdown.
- Sovereign bonds and gold continue to benefit from an appetite for safe-haven assets.
- The US sees its biggest ever single-day rise in Covid-19 cases.
- The UK Chancellor unveils a raft of further measures in a bid to boost the UK economy.
- The pandemic continues to wreak havoc on the UK retail sector and further job losses are announced.
- Bear markets are painful, but remaining invested is crucial: a recovery can be as aggressive as a crisis.
Global Market Summary
Global equity and bond markets had a moderately good week: equities edged up on the hope that a relaxation in lockdown measures will allow businesses to return to something resembling normality, ultimately boosting the economy and increasing consumer spending.
However, global investors also sought relative safety in government bonds: the benchmark 10-year US Treasury fell to its lowest level since April, while UK government debt saw its two- and five-year papers hit record lows of -0.13% and -0.09%, respectively
Similarly, gold – a long-standing safe-asset class – rose above US$1800 per ounce, hitting its highest level since 2011. Gold and just how necessary it is in a portfolio has always divided opinion. Warren Buffett famously said that it was dug up in Africa, shipped halfway around the world, only to be sunk back into the ground in a heavily fortified bank vault, while John Maynard Keynes referred to it as a “barbarous relic”.
There is obviously some truth in both stances, but it does offer investors a diversifier from equities and bonds, particularly in times of crisis – although admittedly only for short periods. It can also serve as an insurance policy against potential central bank policy errors. However, speculation about its benefits is at its most frenetic in times of very high inflation – as was the case in the 1970s.
In this particular investment environment, there are no inflationary pressures to speak of. And yet, gold continues to rise. Ultimately, however, the current extreme monetary measures that have been implemented are likely to trigger a pick-up in inflation, and there is every chance that the central banks will be reluctant to apply the brakes – lest they cause another severe recession. This could push the price of gold even higher.
In the meantime, the traditional disadvantage associated with holding gold (namely the cost of actually holding the asset) has ceased to be an issue – given that the alternative is a negative interest rate. Now that most interest rates are in negative territory, it is becoming increasingly costly to keep money in the bank. Gold’s lack of investment yield therefore no longer matters – it’s all about the capital return of gold versus other asset classes.
While the equity markets may seem to have been relatively calm over the last few weeks, Wall Street’s NASDAQ indices have been hitting new all-time highs as global investors continue to favour the technology sector over many others.
The backdrop to all of this has been the US suffering its biggest ever single-day rise in Covid-19 cases – the highest that any country has seen since the pandemic began (resulting in US President Donald Trump being seen wearing a protective face mask for the first time). The situation in South America is similarly bleak. Nevertheless, the markets remain resilient, aware that central banks will take further action if required.
But as we enter the corporate earnings season in the knowledge that the last two months have registered some very strong gains, the waters are likely to get a little choppier. Just how much choppier will depend on the results and guidance statements released by senior managers about the remainder of this year and 2021.
In the UK, Chancellor Rishi Sunak unveiled a raft of measures to help boost the UK economy and save jobs in a post-Covid-19 world. But despite all the measures implemented thus far, the UK retail sector has been hit extremely hard by the pandemic. This week, Boots announced that 4000 jobs were to go, while John Lewis plans to close eight of its department stores, putting 1300 jobs at risk.
Similarly, US-owned Burger King announced it could cut between 5% and 10% of its workforce. Online fashion brand Boohoo has also had a difficult week following claims that workers at its Leicester factory were making clothes for as little as £3.50 an hour. This has given rise to a plethora of questions about the company’s sustainability credentials and shareholder ownership within the ethical and responsible investment fraternity.
In response, the Chancellor has announced that he is pumping another £30 billion into a jobs and training scheme in order to boost employment. This will take the form of a £1000 job retention bonus for every furloughed worker who is brought back and kept in employment until the end of January 2021. It also includes a £2 billion stimulus scheme to fund apprenticeships and traineeships, as well as subsidising jobs for young people from low-income families.
He also confirmed a £3 billion green investment package to insulate homes make them more energy efficient, a landmark 50% discount scheme for diners in August (capped at £10) and a huge VAT cut to help the hospitality and tourism sectors. Finally, he announced an emergency stamp duty holiday to help revive the property market.
The challenge now as the second half of the year gets under way is to ease the world out of lockdown and back to work. But with no Covid-19 vaccine available and infection rates still rising in many regions of the world, the months ahead look far from straightforward.
Easy monetary policy involving aggressive fiscal policy and zero-bound interest rates should continue to nurture market sentiment and support risk assets. However, low growth, low inflation and low interest rates are likely to continue for longer than most would expect. We might even end up testing the March low before a new bull market begins.
The next few weeks could well prove eventful on the markets as further economic and corporate earnings data reveals the cracks in the global economy and flags up the sectors which have been hit the hardest. Shoring up government and central bank policies should give risk assets some form of insurance policy. But we remain committed to a strategy of owning quality businesses within our investment portfolios.
The first few months of this year saw the world enter a period which has fundamentally changed the way in which businesses operate and how we spend our leisure time. For many of us, this change will continue in post-Covid-19 world. It could even be said that we are entering a new age: exciting and innovative technologies are providing companies in sectors across the board with opportunities to revolutionise the ways in which they do business, and individuals with new ways to relax and have fun.
Bear markets are painful and March 2020 was no exception. However, we should prepare ourselves for an economic recovery and a widening of global stock market performance. In the short term, we may well need to brace ourselves for further periods of turbulence. But returns have often been their strongest right after the markets have bottomed out. Indeed, a bounceback can be as aggressive as a crash.
That is why it is important to remain invested through even the most difficult periods – the caveat being that you should be invested in quality businesses, and at the right price. The last few months have seen a dramatic shift, resulting in attractive opportunities in the US, Europe, Japan, the emerging markets… and perhaps most interestingly in Asia, as interest rates remain low and the US dollar begins to weaken.
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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