Market Summary by Brooks Macdonald - June 2020
An Update on Markets from Brooks Macdonald
The market’s rally has gathered momentum driven on by a wall of central bank liquidity. When analysing both the monetary and fiscal response to the pandemic, G7 governments have pumped more money into the economy in the last three months than they did over 2008-2010 in totality. The market has also enjoyed a sense of exuberance after positive US employment and retail sales statistics. Whilst the financial market rebound has now proven to be V-shaped, supercharged by central bank and government liquidity, a U-shaped recovery is more realistic for the broader economy. When we entered lockdowns the poor economic data of a full crisis was concertinaed into a small number of data points. To expect a similar timeline for the recovery ignores the severe impact on employment, supply chains and consumer confidence that COVID-19 has wrought. Whilst we may need to wait for a full US economic recovery, the coordinated monetary and fiscal policy we’ve seen since the crisis began will undoubtedly help boost the recovery as it develops. In the interim, markets are very happy to look ahead to greener pastures.
Looking to the Long Term
A feature of the last few weeks, recent volatility aside, has been the resurgence of European equities and Cyclical strength with the US and Technology leadership briefly being trumped. Our longer term view is that the post-coronavirus world will still be challenged by low growth and low interest rates, as it was before the virus took hold. As a result we expect growth to continue its relative strength albeit there will be bouts when the deep valuation discount of European equities and Cyclicals catalyse a re-rating. It is also interesting that when there is a shift in sentiment, such as in mid-June, US equities and Technology show more defensive qualities despite being considerably more expensive in valuation terms. This highlights the importance of being balanced in asset allocation with our overweight positions in US Equities and Technology being tempered by a more balanced exposure in, for example, the UK Equity space.
Whilst there are clearly uncertainties out there from an escalation in US/China trade, a second wave of viral infections and Brexit talks floundering, we retain our focus on the long term value in equities over bonds. There is around $5tn in money market funds, equivalent to 25% of US GDP, a level we have not seen since the depths of the financial crisis. Some of this is corporate cash accrued from the record debt issuance over the last few months as well as investors sitting on the side-line during the volatility of March and April. The current rally is earning the title ‘the most unloved in history’ and as US investors consider their options for their stockpiled cash will they rather invest in US 10 year treasuries at 0.7% yield or US Equities, even after the rally, with an earnings yield of 4.4%. We expect this to be a powerful support that can keep the rally in financial assets fuelled even as the economic outlook remains uncertain.
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