Are we entering a new phase in the market recovery?
The summer tends to be a weaker period for equities and economic growth - often referred to as ‘negative seasonality’, as there is usually no apparent reason. This year, however, it seems there are a number of reasons that are stalling the V-shaped recovery we saw in most economies in May and June.
The reopening of many countries (and states in the US) has been halted or paused by the resurgence of COVID-19. Nowhere is this more obvious than in California, Texas and Florida, home to 100 million people and vital cogs in the US economy. Yet the stakes are high in lifting lockdowns. If the consumer-facing sectors that have been devastated by the pandemic can get back to some kind of normal activity, then unemployment can fall and the path to growth can remain smooth. Otherwise, the western economies will have to rely on ongoing fiscal support for the furloughed and jobless, which will be expensive and cannot be guaranteed forever.
The upcoming US election
Another concern is the upcoming US presidential election. Markets are starting to become reconciled, rightly or wrongly, to a possible Biden victory and perhaps even a sweep, whereby the Democratic Party could capture the House of Representatives and the Senate, as well as the White House. The risk to markets is the likely increase in corporate taxes to undo some of President Trump’s 2018 tax cut.
The news is moving on a vaccine, but it’s still uncertain whether we will get one, how effective it will be, whether production will ramp up quickly, whether people will use it, and whether it will change their attitude to social distancing and spending. Vaccine developments are definitely a positive for markets but we should be wary of inflated expectations.
Where could markets go from here?
What all this is telling us is that the global economy will take time to get back to pre-COVID-19 levels, which our US colleague and Chief Market Strategist, Tony Dwyer refers to as a period of correction and consolidation in a recent video interview about the phases of a market recovery.
These events also reinforce our views as to the current opportunities for investors and how we should be positioning our clients’ discretionary portfolios. Of course, there is ongoing monetary support from all the major central banks in the world, and so long as the US Federal Reserve (Fed) and other central banks do not withdraw liquidity, we should continue to have a market tailwind.
Within ‘growth’ and ‘quality’ companies, we continue to favour information technology, healthcare and ESG themes (environmental, social and governance). Regionally, we like what is happening in Asia, where the virus has been dealt with more efficiently. Japan and emerging Asia provide different, yet attractive markets: Japan is a sophisticated economy which is socially ahead of western countries and hence creates unusually advanced products and services. The rest of Asia tends to make simpler products, but China is now competing with the US on technology. Closer to us, we see Europe benefiting from any cyclical recovery in Asia, and also from a possible increase in EU funding following a recent agreement by President Macron of France and Angela Merkel, the German Chancellor, to help the regions worst affected by the pandemic.
The general direction of equity markets could well be positive for the rest of the year, but the bumps we may encounter along the way tell us that investment selection will be crucial, rather than blind faith in central bank liquidity solving a healthcare problem for the world. Good stock-picking and careful sector positioning are likely to prove the most reliable allies in navigating this new phase of the virus.
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Find this useful? Find out more here:
- Where are we in the market recovery? Video interview with Tony Dwyer
- Why European equities could be coming out of lockdown?
- ESG – the COVID-19 silver lining?
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This is not a recommendation to invest or disinvest in any of the themes or sectors mentioned. They are included for illustrative purposes only.
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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.