4th June 2020

Markets have continued to make progress in May, encouraged by further evidence in the developed world of an easing of both Covid-19 related deaths and new cases. There is strong evidence that the lockdown measures put in place in Europe have delivered the desired results, with the reinfection rate now estimated at 0.5 or below in many countries – with the UK being one of the exceptions.

The following chart shows the US and UK market since their ‘year high’ on February 20th.  The FTSE 100 represents the 100 largest companies in the UK and the S&P 500 represents the 500 largest in the US.  The Dow Jones is often quoted but this only shows the top 30 companies and is dominated by technology companies.
Countries such as Denmark and Germany, where restrictions have eased more considerably, have not seen a significant spike in infections. As a result, markets believe that an end is in sight to the recessionary conditions gripping Europe during the second quarter. There have been comments in the news about a worse recession than the Global Financial Crisis, but markets have been prepared to look through this, focussing on 2021 and beyond as there is the belief that the second quarter will mark the trough in economic activity.

In the US, with a November election in the offing, Trump has encouraged the economy to re-open and to date, early indications suggest a strong rebound in economic activity. In the US, the main risk revolves around a possible second wave and the impact of the early resumption of economic activity in some areas, but this won’t become clear for at least a further four or five weeks. Tentative signs across the developed world are that economic activity levels are picking up, albeit from extremely depressed levels.

In China, the economy appears to be returning to some level of normality; in Hong Kong restaurants are now packed with diners and face masks are not required whilst they are eating. Estimates suggest that manufacturing activity in China has returned to around 90% of peak levels, although part of this is likely to be a catch up to solve the supply chain issues experienced at the start of the Covid-19 outbreak.

Markets are clearly now prepared to look through the issues of 2020 in the belief that, even if a full recovery takes two years of corporate earnings, in 2022 will be back at previous peaks.

Whilst markets are today focused on an improving outlook for economic activity and corporate profits, geo-politics will once again need to be closely watched. During 2018, protectionism became an economic extension of nationalism and, if such policies are stepped up, they can pose a threat to economic activity and corporate earnings in normal times. It is unlikely that President Xi will sit back and allow America to make the running with no form of response.

There are increased concerns about geo-politics and the possibility of a resurgence of the disease in the US after a fairly rapid reopening of its economy, but it looks likely that a trading range of the S&P 500 in the 2800-3100 level will be maintained for some months.  Catalysts to break this on either the upside or downside would include clarity on the economic rebound, news on vaccines or medical treatments, or a serious escalation/de-escalation in trade tensions between the world’s two super-powers, the US and China.

At this moment in time, I am not recommending any changes to the portfolios but of course am monitoring this all the time.  If I think anything should be done to the current asset spread within your portfolio, I will be in touch.

As always, should you have any concerns you wish to raise, please do contact me.  I am still working from home, as is Ali for most of the week, so the best number to use is my mobile of 0791 665 2034

I hope you are keeping safe and well.

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