Capital Markets Update
- In a nutshell
- Diverging virus fortunes
- Stimulus continues
In a nutshell
Risk assets continued to rally in May, with global COVID-19 infection rates showing further signs of stabilisation. On a regional basis, (in GBP terms), all major regional equity indexes posted strong returns, although not as strong as April. European and Japanese equities delivered the highest returns, whilst Emerging Markets lagged. Turning to bonds, credit spreads tightened, whilst sovereign yields remained pinned to their lows.
Diverging virus fortunes
Across many countries, infection rates continued to decline, and lockdown measures were tentatively eased in May. In Europe, the daily infection rate is now approximately 90% lower than its peak at the start of April. Countries like Denmark and Austria took the greatest strides in exiting lockdowns, with many restaurants re-opening. In the US, the daily infection rate is roughly 35% lower than the peak in mid-April, and many states have started to re-open. Whilst the global new cases numbers continue to decline, specific parts of the world are still experiencing an increase in infection rates. In California for example new daily cases continued to rise in May. The picture looks worse in many developing economies, with India, Brazil, and Argentina grappling with an explosion in infection rates.
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.
The global fiscal stimulus spotlight shifted to Europe in May, with meaningful progress made on a European Union (EU) recovery fund. The plan would permit the European Commission to borrow EUR 750 billion in financial markets (roughly 5.4% of EU GDP). The package would then make grants and loans available for EU member states, focused on those most in need. Countries like Spain and Italy have been particularly hard hit from the coronavirus, and so the fund should provide relief to them, without having to inflate their national debts further. In the UK, the government’s Job Retention Scheme was extended to the end of October. This program helps to protect jobs by shifting the wage burden from companies to the government with the furlough scheme. The uptake has been high, with a recent Office of National Statistics (ONS) survey showing that roughly 80% of businesses have applied for the scheme.
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 through April and May 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.
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