Capital Markets Update
- In a nutshell
- Global cases stabilise
- Signs of economic recovery
- Uplifting earning season
In a nutshell
Stockmarkets marched on in August, driven by better than expected corporate earnings, global COVID-19 infection rates stabilising and optimism over future vaccines. This was led by large cap US technology names, whilst old economy ‘value’ names lagged. In GBP terms, US and Japanese equities delivered the strongest returns, whilst Asia/ Emerging Markets lagged. Whilst government bond yields ticked up this had a detrimental effect upon fixed income returns.
Global cases stabilise
August saw global COVID-19 infection rates start to stabilise. This was largely driven by new case growth slowing in the US. However, in Europe, a ‘second wave’ looks to be emerging, particularly in France and Spain. And in some emerging economies the situation appears similarly worrying, with countries like India seeing no respite in new case growth. On the vaccine front, there were some encouraging results from the Russian ‘Sputnik V’ trials. However, further trials on a larger population sample of different ages and ethnicities (“Phase 3 trials”) are required before it can be administered to an entire population with confidence. Several other vaccines are currently in or beginning Phase 3 trials, the results of which should come out in the fourth quarter of this year.
At present there remains great uncertainty over the future path of the virus, and a vaccine is still a distant prospect. Until then, policy makers in developed countries will have to continue to walk the tight rope of trying to reboot their economies without generating a ‘second wave’ of infections. And for policy makers in many developing economies, the task of containment needs to be weighed against the risk of lasting economic damage.
Signs of economic recovery
Many data releases were encouraging in August. The Purchasing Managers Indices (PMIs), an index of the prevailing direction of economic trends, for both manufacturing and services handsomely beat expectations in the US. Housing data was also strong, with housing starts, existing home sales and homebuilder sentiment beating forecasts. In Europe, industrial production continues to rebound, whilst there was an increase in new car registrations, evidence that government support schemes are helping. High frequency data (e.g. travel and navigation app usage) across the developed world also points to greater economic activity. However, not all the economic releases pointed to such a rosy picture. In the US, the Empire State and Philly Fed Manufacturing surveys missed expectations. And in Europe, business surveys suggest that corporate confidence remains dented. Fiscal support looks to be waning, for example with the new coronavirus relief bill stalling in Washington and the UK furlough scheme ending in October. This presents a major threat to consumer well-being.
Uplifting earning season
August saw the final numbers roll in from the second-quarter earnings season. The results meaningfully surprised on the upside, although expectations were weak. In the US, earnings per share were down 33% year on year. This was a positive result however versus expectations, with 84% beating forecasts. Crucially, guidance for the coming quarters was revised higher, fueling optimism for investors. In absolute and relative terms, healthcare and information technology (IT) continued to be the best performers, whilst the energy sector continues to lag. The US stock market’s large weight to IT and healthcare meant it outperformed most other regions.
Multi Manager Team Views
We are encouraged by the improving economic data releases, along with continued fiscal and monetary support. However, the second COVID-19 infection wave appears to be materialising in Europe, showing the challenges of re-opening economies.
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