Looking through the headlines to the recovery beneath
Share prices continued to ebb and flow with the latest COVID-19 developments, falling as fresh outbreaks triggered isolated lockdowns and restrictions on travel, but rising on optimism of progress towards a vaccine. From the end of June to mid-August, equities were up by between 1 and 4 per cent in sterling terms, with the exception of Japanese shares, which lost around 2%. July was a generally weaker month on concerns over a fresh outbreak across the US Sun Belt states, but improved sentiment drove riskier assets higher in early August.
We trust this finds you well
As the pandemic continued to shape daily life, we wanted to ensure clients knew they could reach out to us at any time for queries or clarification. Our team remained fully committed to the ongoing management of investments through what continued to be an extraordinary period.
Real yields turn negative as gold and the dollar diverge
July saw the continued fall in real yields to record lows, with the real yield on long-dated US treasuries turning negative for the first time. This resulted from central bank buying driving bond yields to record lows, despite some investors' concerns about a future rise in inflation. The fall in real yields contributed to significant moves in two other markets: the price of gold soared to a new high in August and was now up 26% on the year, and the US dollar fell to its lowest level since May 2018, some 10% below its March high.
Behind the alarming headlines, growth returns
Alarming headlines across the media portrayed an economic catastrophe, with the UK recording the biggest fall in growth on record. The second-quarter contraction of 20.4% was indeed an extraordinary number, but context was important: what else was to be expected when the government had shut down the economy? Breaking down the quarter by month revealed a fall of 20% in April, followed by rises of 2.4% in May and 8.7% in June. Once lockdown restrictions began to be lifted, the economy started to grow again.
Companies beat gloomy forecasts but stimulus talks stall
Economic data generally continued to improve on earlier catastrophic levels, and this was also the case during the US corporate reporting season, where 85% of the top companies beat analysts' gloomy forecasts. All data required extreme caution, however: US second-quarter GDP was reported as showing a fall of 32%, an annualised figure that overstated the severity of what was already the worst quarter in history.
With the US aid package for the unemployed ending in July, the only thing Congress could agree upon was its opposition to President Trump's executive orders to extend the aid until December. At the time of writing, talks had broken down, with both parties blaming the other's intransigence.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Confidence is the key to recovery
On the face of it, investors appeared to be coping fairly well with the economic consequences of the pandemic, though the backstop of central bank buying did muddy the waters. Expectations had been set so low that the majority of data, both economic and corporate, had pleased. However, such was the collapse in activity that any reopening should have produced positive figures; the real challenge lay ahead.
Furlough schemes, in their various forms, had undoubtedly sheltered many, and in the case of America had offered a greater benefit to some than actually working. The UK scheme was already tapering, with employers being asked to contribute, forcing an evaluation of whether to keep employees on the payroll or reduce numbers. During lockdown, many furloughed workers had been financially better off; combined with the absence of holidays, spending had been channelled into home improvements and online purchases. If this was replaced by the fear of unemployment, spending could be curtailed significantly.
The key to future growth is confidence, and that is linked to finding a successful vaccine.
We thought the key to future growth was confidence in both health and economic wellbeing, and that this was intimately linked to finding a successful vaccine. But this presented its own challenge: despite suggestions that a successful product was not far off, surveys showed scepticism among the public over the short timeframe of the clinical trials compared with those of previous vaccines. This might translate into a marked reluctance to be first in line. We expected markets to remain unsettled, but unless the news worsened markedly, central bank buying and the search for income would continue to offer support.
We saw no reason to change our view that the risk of a further sell-off remained and that better opportunities may yet present themselves. We held considerable cash levels ready to deploy and continued to evaluate potential new funds.
Cash ready to deploy
We continued to hold significant cash levels, ready to invest when conditions warranted. We had been actively evaluating potential new funds for inclusion across the portfolios.
Diversified across alternatives
Our portfolios diversified risk by investing in a wide range of assets using actively managed funds with sound investment processes. Alternative holdings included gold and silver, infrastructure, agriculture and absolute return strategies.
Support from central banks
Unless the news worsened markedly, we expected central bank buying and the search for income to continue offering support to asset prices. Markets would remain unsettled, but the broader underpinning was in place.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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