Market update – June 2020

End of lockdown boosts optimism

Global stock markets continue to recover from the sharp falls they experienced early in the year. The MSCI World Index is now down just 10% year-to-date, having been as much as a third lower. Investors have been encouraged by the gradual restart of economic activity in major economies and the continued decline of new coronavirus cases in developed markets. So far, investors have largely overlooked very weak economic data relating to the period of lockdowns. They will likely pay closer attention to upcoming data that sheds light on how quickly consumer and business confidence are recovering from the pandemic.

Geopolitics returns to centre stage

China’s plan to impose security legislation on Hong Kong has led to renewed tension with the US. The Trump administration has said it no longer regards the Special Administrative Region as autonomous from China, potentially opening the door to tariffs and investment restrictions on Hong Kong. While the US will not necessarily opt for this path, renewed US-China tensions could have negative consequences for the global economic recovery.

Diplomacy will also be required in the eurozone as officials attempt to overcome opposition to a planned recovery package. The European Commission has called for a €750 billion fund to make grants and loans across the region. Italy and Spain, both hard hit by the pandemic, would likely be among the largest beneficiaries. The proposal would be a significant step towards greater integration of the Eurozone, which has long been seen as key to helping weaker eurozone states manage their debt burden.                                                     

Central banks ponder next steps

Central banks have played a key role in helping ensure the flow of liquidity and credit through the crisis. One sign of their success is companies’ continued access to bond markets; in the US, 2020 is on track to be a record year for corporate debt issuance, with over $1 trillion raised so far. While more debt is not without long-term challenges, for now it has provided companies with much-needed liquidity and averted a credit crunch.

The Federal Reserve and Bank of England are likely to remain on hold at their June meeting, though both have indicated that they are mulling options to further stimulate growth. The Fed chairman reminded investors late in May that “the Fed is not out of ammunition.” More controversially, the Bank of England’s governor has said that negative interest rates are “under active review”.

Portfolio positioning

Where appropriate, we added modestly to equity positions in March and April. Low interest rates and stimulus from governments and central banks should continue to support equity markets, although we expect further volatility given the uncertain pace of economic recovery and concerns about a second wave of Covid-19.  We maintain an allocation to alternative assets. They have helped to protect portfolios in recent months and we believe they continue to offer valuable defensive and diversifying properties.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

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