MARKETS – GENERAL
Some return to normality looks likely for the summer although many equity markets would appear to have already factored this in given their meteoric rise from the March lows. As lockdowns are eased, there is a feeling of trepidation. Will restrictions be loosened too quickly resulting in a second wave of infections, and will consumers really return to their normal patterns of behaviour? We are unsure of the former (see more later), but on the latter, even the earliest indications are that consumers remain cautious. No ‘back to normal’ that’s for sure. Perhaps of most concern is the recent negative news surrounding the surging infection rates in certain localised parts of Germany and the continuing climb in the US numbers. The US certainly looks to have moved too early, with many states easing restrictions before the infection peak had occurred. We continue to have very real concerns about the US over the next few months as the impacts of what looks like a premature easing are realised. Economic data is predictably awful although we are going to see some positive relative month on month numbers coming through now that economic activity has resumed. The question is whether the improvement in the data will be sufficient to get us close to pre-COVID-19 levels and we remain sceptical. For now, markets continue to trade at elevated levels, with intervention from central banks and governments being the primary focus for investors. These measures are factored in – any deterioration in newsflow may need more stimulus to keep markets where they are over the next six months (or until the US Presidential election, a (major) topic for another day, and another reason for continued caution). Finally, dividend levels in the UK are c.30–35% down, yet the underlying equity market is c.15% off – there is a disconnect here that only a rapid recovery in dividends can solve … and we don’t expect to see that.
EUROPEAN EQUITIES
Europe has no long-term problems to contend with and is practically immune from the wider fortunes of the global economy. Is this right? Of course not. We’ve written extensively about the structural issues facing the eurozone economy and as an advanced exporting bloc, slower global growth is a major challenge. However, on a relative basis, there are some attractions to a European allocation now. Certainly compared with the US, EU member states are further ahead in tackling COVID-19 and, despite being a disparate group of nations, seem to have acted with more collective leadership than the US administration, having agreed on a coordinated approach to track and trace across the continent. Generous assistance schemes mean that significant protection against the economic downturn has been provided (for individuals at least) and the possibility of a synchronised upturn next year is real. The furlough schemes look to be superior to the US response to the employment crisis. The recovery proposal that is likely to be passed in July will see fiscal transfers from the northern states to more challenged ones in the south – an early step towards fiscal integration, which is controversial but of immense significance. European policy makers are simply not making the sort of mistakes that they made in the sovereign debt crisis of 2011. Long term, the path is unlikely to be smooth – Italy remains a real concern, France perhaps the next one on the list – but for our adventurous investors this seems the right time to dip our toe into the European waters, even if we can’t make it to the Mediterranean this year!
Investment Line is written and edited by members of the Mattioli Woods Group investment committee and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.
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