Market update – July 2020

Learning to live with the pandemic

Covid-19 is now on very different trajectories in different parts of the world. While a handful of countries have managed to eliminate it, some – especially in emerging markets - are still experiencing widespread transmission. Many others are now dealing with regional or local recurrences. In the US, California, Texas and Florida are all experiencing sharp increases in new cases, while the UK has put the city of Leicester back into lockdown. Though slightly off their post-Covid highs, global equities remain resilient. This suggests that investors continue to believe the virus will be contained in the coming months, allowing for a rebound in corporate profits next year.  

Political risk remains high

Conflict has returned to the streets of Hong Kong, with the police making their first arrests under a new national security law imposed by Beijing. The new legislation is also leading to diplomatic tensions, with the Trump administration announcing its intent to revoke Hong Kong’s preferential trading status. While the moves have largely been symbolic so far, renewed trade conflict between the US and China could be a significant headwind to the global economic recovery.

The upcoming US election may push Trump towards a tougher line on China, especially with Democrat candidate Joe Biden performing well in recent polls. One potential shock for markets would be a Democrat victory in both the presidential and senate races. This would allow Biden to deliver on his campaign pledge to reverse Trump’s tax cuts, which provided a significant boost to company profits.

UK set for sharp rise in unemployment

In many countries, governments are starting to roll back income support measures introduced in lockdown. In the UK, employers will soon have to contribute to the cost of furloughing staff. With over nine million workers currently benefiting from the scheme, this could mean the UK sees a sharp rise in unemployment in coming months. The increased risk of no-deal Brexit will not help. However, current government spending looks unsustainable. The UK budget deficit will be close to 17% of GDP in the current financial year, according to Schroders’ economists. Capital spending will now likely play a bigger role in the UK’s recovery plans, with Boris Johnson indicating the government would bring forward £5 billion of infrastructure projects. Chancellor Rishi Sunak is expected to announce further measures in a  summer budget on 8 July.

Portfolio positioning

Low interest rates and stimulus from governments and central banks should continue to support global equity markets. However, we are mindful of the risk of renewed volatility, given concerns about a second wave of Covid-19 and the uncertain pace of economic recovery. We are conscious that many charities have been impacted by a drop in income and have been looking for income-generating opportunities. In the past month, we have made an allocation to infrastructure stocks in many portfolios. These companies offer attractive yields, a high degree of earnings visibility and an element of inflation protection. We believe they are currently attractively valued on both an absolute and relative basis. Where appropriate, we also have an allocation to gold, which we believe continues to offer valuable defensive and diversifying properties.

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