Markets have continued their topsy turvy progress this week as investors try and digest the rising global COVID infection rates, particularly focussing on the US, where rates continue to climb and have now surpassed the daily infection rates from April. The IMF have also poured more cold water on the recovery story with a downward revision of global growth rates and an uncertain exit from the global recession – forecasting global trade will fall by 11.9% in 2020.
We are now firmly anchored in a stalemate of market exuberance versus factual economic and infection rate data. As we are moving ever closer to some catastrophic 2nd quarter GDP revisions and global companies have started laying off their workforce in meaningful numbers, the markets have struggled to build any further momentum. Set against this, we have levels of liquidity never seen before from central banks and meaningful progress in vaccine development and the provision of early stage steroids to manage the impact of the actual COVID symptoms.
Investment markets, once concerns resurfaced two weeks ago about rising infection rates, have once again started to focus on paying up for global growth stocks as the strong, cash generative companies gain market share and become even stronger. It has been noticeable how investments focussing on Environmental, Social and Governance issues (ESG) have performed very well this year and against market outflows of $350bn in the first quarter of the year, ESG strategies saw an inflow of $45bn. It makes sense to us as investors that favouring companies who have a diverse board, actively engage with shareholders and care about their staff and their long-term impact on the environment are desirable investments to hold. We have already integrated some key ESG strategies into our mainstream models, alongside our pure ESG model portfolios.
Despite the issues with higher infection rates, the US consumer has provided a real boost to the economy over the last month with 60% of the US unemployed benefitting from a higher level of income from unemployment benefit, than when they were working. The primary reason for this is that many more lower paid workers have been laid off than those in higher level management positions and this influx of additional income has helped a recovery in retail. The US Senate continues to talk down any possibility of a second national lockdown, arguing that it goes against the constitutional rights of US citizens and will irreparably damage the economy, so we continue to watch the US market closely.
Here in the UK we have been treated to pictures of overcrowded UK beaches and Government commentary that beaches may have to be closed if people do not start to heed guidance and use common sense. It may be that such a thing proves too much to ask for such a high proportion of furloughed workers who have been cooped up at home for the last three months.
We must remember that there are things we know (such as the size and scale of central bank stimulus) versus things that we do not yet know (secondary infection rates and the length and depth of the recession). In terms of the pandemic, Asia and Europe appear to be through the worst of the first wave of the pandemic. However, the situation is less clear in the US, where outside of the North East (the original epicentre), cases are on the rise once again, particularly in states where lockdowns ended too early. Further afield, the case numbers in Latin America, particularly Brazil, and in India, also give cause for concern. Worryingly, political and economic considerations are taking priority over health concerns in many countries, and a return to nationwide lockdowns appears unlikely. Even where concerns over the first wave have eased, such as in parts of Asia and Europe, we will continue to see localised lockdowns to contain outbreaks, and even in places such as the US, where there appears to be a particular reluctance to lock down activity, we are likely to see activity levels lower as people choose to stay at home even if they are not forced to by lockdowns.
The flash Purchasing Managers Index (PMI) figures this week for the UK and Europe were better than expected, and the US was only a little off the expected figure. The stats show the economies are still in contraction, but confidence is double what it was back in April. Pent up consumer and corporate demand after months of lockdown have supported the recovery to date. We now enter a period of uncertainty as to whether the next big news will drive markets higher, or give a cause for retrenchment from here. We see many reasons in valuation levels and improving macro conditions to support a move higher, however, as we wrote last week, we are being sensibly cautious as we move into the summer months with our client’s portfolios. Will consumers be confident enough in Government guidance, the common sense of their fellow people and the improvement in COVID treatment, to return to their previous habits? Only time will tell.