Capital Markets Update
- In a nutshell
- Second wave worries intensify
- Economic picture uncertain
- Brexit is back
In a nutshell
Risk assets were more volatile in June, but overall eked out another positive return. On a regional basis, (in GBP terms), Asian and Emerging Markets equities delivered the best returns, whilst Japanese equities lagged. In bond land, sovereign yields did not change meaningfully.
Second wave worries intensify
June saw a sizeable increase in global COVID-19 cases, as economies around the world continued to take steps to re-open. The increase in the infection rate was largely driven by the Americas, with South-East Asia also contributing. The United States (US) was a standout country, seeing confirmed case numbers more than double over the month. Within the US, the story varies state by state. Some states like New York that were hardest hit with the first outbreak saw new cases continue to decline, whilst others like Texas and Arizona are seeing a surge in infections, leading to calls for new lockdown restrictions to be imposed there. Looking over the pond, Europe seems to be having more success in ‘flattening the curve’.
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 tightrope 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.
Economic picture uncertain
Economic data releases in June largely beat expectations, but the picture ahead remains uncertain. The Purchasing Managers Indexes (PMIs), a monthly survey of private sector companies, showed an improvement in global activity, but this is coming from a low base. The US jobless claims increased by less than expected, and US road traffic data suggests further normalization of economic activity. However, other data points were less encouraging. The IMF downgraded global growth prospects in 2020. And the minutes from the Federal Reserve’s meeting highlights the folly of attempting to predict the future path of the economy. Officials cited ‘extraordinary’ uncertainty and ‘considerable risks’ to the outlook. A number saw ‘substantial likelihood’ of additional waves of virus outbreaks, with the potential to cause more lasting economic damage.
Brexit is back
Brexit talks are set to intensify in July, as worries about a ‘no deal’ outcome have resurfaced. The transition period ends on 31st December, and the all-important trade deal has yet to be agreed. Prime Minister Boris Johnson repeated his threat to walk away from talks in June, which startled the business community. A letter signed by more than 100 company chiefs and entrepreneurs signaled renewed concerns over the negotiations. The EU’s chief Brexit negotiator Michel Barnier did provide some hope of breaking the deadlock, saying that he was willing to look for compromises on the thorny issue of level playing field rules for businesses.
The history of the Brexit negotiations suggests that a no-deal outcome is likely to be avoided. However, that same history also shows that the road to any deal will probably be fraught with bluffing and blustering. Therefore, it is not unreasonable to expect UK equities to be volatile over the coming months as the negotiations reach a climax.
Multi Manager Team Views
We are encouraged by the continued monetary and fiscal support from policymakers and believe this has raised the floor for equity prices. However, the size of the rally suggests that markets are starting to price in quite an optimistic recovery scenario. Given the current uncertainty over both the future direction of the virus (risk of a second wave) and the economic fallout, we believe an element of caution is therefore still warranted on markets at this juncture.
The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.