Investment Comment July2020

In June, many governments moved to ease lockdown measures and restart their economies. Equity markets continued to trend higher on the positive news and bond markets remained stable.  As worldwide cases of Covid-19 passed 10 million, the prospect of regional flare ups in the virus provided a counterpoint to a quick reopening, with areas of Germany, China, and several US states seeing renewed outbreaks. Whether this will be a quick rebound, or a long, slow recovery remains to be seen, but the prevailing sentiment in markets in June was one of anticipation that economies would continue to recover.

At the beginning of the month the US posted a surprise rise in employment, adding 2.5 million jobs in May. Federal Reserve Chairman Jerome Powell signalled that interest rates will not rise until 2022, and that US GDP will contract by 6.5% in 2020. His dovish tone initially rattled equity markets but they ended the month flat, with the MSCI USA index returning 2.83%. Despite consumers being less indebted on average going into this crisis compared with 2008, it is clear from April data that confidence has been dented by Covid-19, with personal savings rates rising to 33% of disposable income, from 8.2% before the crisis. The recent spike in new infections and subsequent reversal of easing measures in some states has made the prospect of further fiscal stimulus more likely. The potential political impact of the pandemic, as well as an escalation in social tension surrounding the ‘Black Lives Matter’ campaign have increased uncertainty around the upcoming presidential election race, with current polls indicating a fall in support for incumbent President Trump.

European markets were relatively strong in June, with the MSCI Europe ex UK index returning 5.04%. However, the IMF forecast of a 10.2% contraction in Euro area real GDP in 2020, indicates Europe could be the hardest hit region from Covid-19. Even so, the reopening of European economies was reflected in a recovery of Purchasing Manager Index (PMI) numbers from the all-time lows seen in April. In France, the composite figure edged above 50, indicating an expansion in economic activity, and the Euro area composite figure moved nearer 50, at 47.5, significantly above April’s low figure of 13.6. While Europe has not suffered the high rate of unemployment seen in the United States, when furlough schemes wind down over summer, economists have suggested that unemployment could spike with an estimated 9 million workers across the continent expected to be at risk. The French Labour Minister, Muriel Penicaud, responded in the month by announcing a two-year extension to the France employment retention programme; pressure mounts for other major European countries to follow suit.

The UK equity market was a global laggard in June, as the MSCI UK index posted returns of 0.05%. Prime Minister Boris Johnson announced a raft of measures to reopen further parts of the economy on July 4. In a sign of stress in bricks and mortar retail, shopping centre owner Intu slid into administration, as the slump in non-food retail manifested in deferred rent payments to landlords. Government debt-to-GDP rose above 100% for the first time since the Second World War, due to both declining tax revenues and a rise in public spending. However, gilt investors appeared untroubled by the news, and the price of 10-year UK government debt remained flat. Brexit negotiations also moved tentatively forward for the first time since the continent went into lockdown, with both sides indicating appetite for an agreement to be reached before the end of summer.

Emerging Markets rose strongly in June, at 6.01%, despite some developing nations continuing to experience strain. Signs of a swift economic rebound in China became more evident, with vehicle sales for May increasing 14% YoY to 2.2 million. The country’s second biggest shopping event of the year, the 6.18 festival was also a boost with key e-commerce businesses experiencing double-digit growth relative to last year. Coronavirus cases in Beijing spiked in mid-June, linked to a food market in the city, after 50 days without a case. In response, the region imposed a targeted lockdown in the neighbourhoods around the market. The speed of response and containment to what was a small outbreak should go some way to reassure consumers and investors that a mass flare up in the region is now less likely. The virus measures implemented, and monetary and fiscal stimulus provided, mean that China is still projected to end the year with positive GDP growth. However, the prospect of unresolved trade deals with both the EU and US and the simmering tensions in Hong Kong mean that there is still significant uncertainty in the region for investors.

Japanese equities rose by less than the wider Asia Pacific market, as the MSCI Japan index returned 0.46%. The Bank of Japan maintained interest rates at -0.10% and reiterated its intention to purchase an unlimited amount of Japanese government bonds if required. This policy operates in concert with a policy known as yield curve control, where a Central Bank actively sets targets for government bond yields and pursues buying or selling to meet such a yield. The policy is seen as unorthodox but is important to note as more central banks look to consider and adopt measures previously pioneered by Japan, such as buying bond ETFs, to combat the current crisis.

While markets were generally positive in June, it is clear the world economy is not past the impact of Covid-19. Regional flare ups, uncertainty in long-term policies, and the capacity of already distressed economies to handle a second wave are all risks to consider in the coming months. On the other hand, a declining number of cases and fatalities have led many governments to commence a loosening of lockdown, aiming to alleviate the strains experienced since lockdowns were instituted. Central Banks have so far been able to reassure market sentiment that they will stand behind the recovery to avoid a repeat of the volatility experienced in March.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.