Stimulus measures underpin a continued recovery
Stock markets continued their rally from March's low, buoyed by a gradual easing of lockdown conditions and further measures to stimulate the global economy. In sterling terms, the US, Europe and Japan were the larger beneficiaries, rising 7 to 8 per cent, with returns flattered by currency outperformance against the pound. UK shares gained a more modest 3.5%. Government bonds were broadly unchanged, but corporate and emerging market bonds improved by up to 8%.
Thank you for your kind words
We wanted to express our sincere gratitude for the positive comments and good wishes received from clients during what had been a very difficult period. We were overwhelmed by the kind gestures and by the satisfaction expressed regarding investment performance in what had been a torrid time. Our success was a reflection of the dedicated and committed individuals working for us. We were by no means perfect, but we were acutely aware of the responsibility we had to our clients, and every member of the team was committed to achieving the very best result. As the months rolled by, we looked forward to getting back to some form of normality.
European unity and a surprise surge in US jobs
Governments and central banks announced further measures to stimulate the economy, and for once it was Europe that pleased investors. A Franco-German bailout package was proposed, comprising largely grants targeted at economies worst hit by the pandemic. Germany announced its own domestic stimulus package, and the European Central Bank surprised investors with a larger than expected increase in its Pandemic Purchase Program, extended until at least June 2021. The realisation that the EU might finally be getting its act together saw strong demand for the euro and European shares, while bonds issued by peripheral countries such as Italy, Spain and Greece were also bid up in price.
Economic data, though appalling, generally showed an improvement on the previous month. First quarter GDP numbers confirmed negative growth, and the expectation was for far worse in the second quarter, but investors were focusing their expectations on 2021 for signs of any genuine recovery.
US-China friction intensifies over the pandemic
Investors' nerves were tested as tension rose once again between the United States and China. Initially, accusations centred on China's failure to disclose the facts of the pandemic fully and in a timely manner. But as China sought to impose additional legislation on Hong Kong, this provoked threats of further measures from the Trump administration and a 5% fall in Hong Kong shares.
The latest US employment data, released in the first week of June, confounded investors with a surprise 2.5 million increase in jobs when the loss of a further 8 million had been anticipated. This demonstrated the difficulty of economic forecasting in the current climate, but pressed the turbocharge on US shares, which were briefly in positive territory for the year.
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
Too much optimism may be priced in
Given the economic and political background, stock markets had been remarkably resilient since the initial collapse, with the broad US market recording its biggest 50-day rally in over 60 years. Europe had joined in more recently, buoyed by optimism that, at last, the continent was grasping the idea of acting as a united eurozone. German fiscal expansion combined with a common fiscal policy were the two measures investors had long demanded to address the structural imbalances at the heart of the single currency.
However, we felt that too much optimism was priced into markets and that a second phase of the pandemic could not be ruled out. It would take time to determine just how badly businesses and individuals had been affected. Corporate earnings would fall in the near term, and there would be a hit to investment income. In normal times, investors were guided by company chief executives as to how well their businesses were doing, but in the current environment this guidance had frequently been withdrawn, leaving greater scope for surprise when results were officially announced.
The US market has seen its biggest 50-day rally in over 60 years.
What happened next would be driven by the two most important narratives of the day: the attempt to reopen economic activity while controlling further outbreaks of the virus, and worsening relations between the United States and China as the presidential election approached. With the return offered by UK savings accounts and government bonds struggling to beat 1%, and many companies cancelling their dividends, it would be a tough year for income seekers. But we expected a gradual return to dividend payments the following year, making a solid long-term case for equities.
Our March purchases in the UK and US had put portfolios in a good position to benefit from the improvement in sentiment. Feeling that the recent rally had run too far in the short term, we took some profits and increased cash levels.
Profits taken selectively
Having benefited from the rally since March, we reduced exposure selectively and increased cash levels. We believed the risk remained of markets selling off again and that better opportunities may present themselves.
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.
Income outlook
With savings rates and government bond yields struggling to beat 1%, and many companies cancelling dividends, 2020 would be a tough year for income. But we expected a gradual return to payouts in 2021, making a solid long-term case for equities.
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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