MARKETS – GENERAL
Markets remain volatile, but at the time of writing they are in relatively buoyant mood. How long this lasts, however, no one can be sure. In this setting, with so much uncertainty around how the global pandemic will play out, even a week is a very long period for markets to navigate.
The current source of the relief for markets seems to be three-fold. Firstly, societies across the globe are gradually lifting the lockdown and the hope is that some sort of normalised economic activity can resume. Secondly, significant excitement surrounds the development of a vaccine with successful first trials carried out on humans suggesting that antibodies can be successfully produced to provide immunity to the virus. Finally, we have the not insignificant progress that appears to have been made in Europe with France and Germany backing a €500 bn fund to provide grants to member states affected by the crisis.
All of these are very welcome with the vaccine progress being the most important catalyst for risk assets. Even when normal life resumes, the prospect of a second wave – potentially more disruptive than the first – is very real, and only when a vaccine is secured will lasting relief be felt. It feels as if the US is taking a real gamble in the speed with which it is reopening its economy, and the rapid ascent of equity markets from the March lows there still looks excessive to us. The economic data is predictably appalling, and if unemployment and economic inactivity persists for the period it is expected to, it is difficult to see company earnings holding up. Markets are probably hoping for yet more stimulus in the US – especially given just how gloomy the predictions from the Federal Reserve have been – but it still feels as if hope is driving markets rather than anything truly concrete. One other danger that seems to be being overlooked is the fallout from this crisis in US-China relations. President Trump is not going to get the economy up to full speed by the time of the election (if indeed it occurs as scheduled in November), so his best tactic here is going to be to heap as much blame on China as possible. Indeed, the exchange of words so far has been concerning and the effects of a further deterioration in the relationship between the superpowers could be very significant.
For now, investors can breathe a sigh of relief that some positive news has been felt in markets, but negotiating the summer could prove difficult and later in the year fears of a second wave will move to the front of investors’ minds. The mantra of participating in markets but with a significant skew to protection remains one we adhere to. It is true that the delivery (not hope, not plan) of a vaccine will be a game changer. Until then, we do feel recent exuberance is somewhat misplaced. There will be winners from this dreadful virus; we will continue to work hard to find them. Meanwhile, nobody should be under any illusions – we all need to avoid some of the losers, as many will simply not make it through to the promised uplands of a vaccinated world.
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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