Market Commentary June 2020
Equity markets close second quarter strongly.
June saw a continuation of the second quarter rally in global equities, with most markets turning a third successive month of gains. Investors, emboldened by the prospect of further central bank support if the global situation deteriorates, continued to plough money back into shares, in a rally driven primarily by liquidity and momentum. The rally continues, however, to be very narrowly based, with technology stocks driving the overall market return.
Technology stocks continue to drive narrow recovery.
Once again in June, it was the technology sector that led the rise in particularly the US equity market. The global lockdowns have produced a perfect environment for many of the tech giants, such as the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google), whose business model is the delivery of a product or service purely through digital means. By contrast, many stocks outside this narrow sector sat at or near their lows for 2020.
Virus data stokes fears of a second wave.
June served to give some guidance on what happens as lockdowns are eased in the major markets. In the UK, regional pockets of increased spreading were observed, resulting in Leicester being locked down for a further two weeks. Meanwhile, the data coming from those US states that have come out of lockdown shows a clear indication that a second wave of the pandemic is likely. Governments are beginning to prioritise the economy over public health, and it seems unlikely that a second wave would be met by total nationwide lockdowns. The response is expected to be more on a regional basis as required.
Healthcare funds remain solid.
Whilst healthcare stocks have not performed as well as the online technology stocks, they have been seen as an ideal inclusion in portfolios, not because they will all benefit from the current situation, but because they can all expect to enjoy higher national health care spending in the years following Covid-19. Typically, health care funds saw a smaller drawdown than the general market, and are now showing a gain for the year.
The World at a Glance
Source: Bloomberg – National benchmark indices in local currency
UK + 1.4%
Germany + 6.2%
France + 5.1%
Italy + 6.5%
UK equities were once again at the bottom of the performance table in Europe, as Covid-19 data continued to suggest that Britain is still having trouble containing the virus. Leicester was placed back into lockdown for a further two weeks, as the infection rate there had risen above 1. Elsewhere, the major EU markets all performed extremely well, returning 5-6%, as investors looked to the other side of the current crisis, with businesses now beginning to reopen in most areas. International travel also began to open up, which meant relief in sight for port and airport operators, who have been hard hit by the shutdown.
The dollar was generally slightly weaker in June, as Covid-19 data continued to paint a picture of gloom in many states. Also, attention began to be paid to the coming US election, now only four months away, with some commentators suggesting a Biden win for the Democrats. The clear winner over the month was the Euro, as data continued to point to an improving Covid-19 experience, and the markets looked to the German presidency of the EU Council beginning in July, and covering the period up to the deadline for the Brexit agreement to be concluded.
All sections of the global fixed income market returned gains in June, with, once again, the strongest performance coming from high yield bonds, which had been the hardest-hit during the Q1 downturn. Money continued to flow into all areas of the bond market, as investors sought some form of return in a chronically low yielding environment; even government bonds were bought; yields were little changed in the UK and US sovereign markets, but tended lower in the weaker EU economies, and even moved further into negative territory among the stronger EU nations. Japanese yields continued to languish below zero in the shorter end of the curve, gaining slightly from ten years out.
*A Generic bond is a theoretical bond that always has the specified tenor, unlike a Benchmark bond, which is a physical bond, with a decreasing tenor.
Investment Thoughts from Q2
This month, we take stock of where we are after the collapse and rebound in global markets in H1, and look at three questions that are topical for our clients. We start by addressing the decision to have little or no direct exposure to the UK equity market.
Why has the UK recovery been weaker than in other equity markets?
For several weeks our analytical tools have been suggesting that the UK equity market is a very unattractive place to be right now. Even the most casual observer of markets cannot have failed to spot that the UK equity market has not bounced from its low point to nearly the same degree as the rest of the world. The table below shows that all three sections of the UK market experienced the largest falls and the slowest recoveries in the world during the first half of the year:
There are several reasons for this; some are easily identifiable, others less so.
Firstly, before Covid-19 became an issue, the UK was already looking less attractive than many other markets. Investors were already nervous about the Brexit agreement with the EU. The UK had just left at the end of January, and the timescale for concluding an agreement was already looking very short, with Boris Johnson having fixed the deadline at the end of this year. Since then, progress has been understandably slow, and what news flow has been seen has suggested that the confrontational tenor of the talks has not improved from the pre-Brexit phase. Whilst the damaging consequences of not reaching an agreement would fall on both sides, the published data has seemed to suggest that Britain has had a much worse experience with the pandemic than many European nations, notably Germany.
News headlines, notwithstanding the large differences in national measurements, have shown the UK as having the second worst death toll from the virus after the US. This has not helped market sentiment, especially as the UK is now coming out of lockdown, and we will soon see just what the effect has been on the level of unemployment. Many commentators are also expecting to see a second wave of the virus, and possibly a second lockdown, as we are already seeing in Leicester. The third main reason is linked more to the fragile state of the oil market. The UK equity market is more exposed to oil than many other national markets, with shares in Royal Dutch Shell, formerly the largest FTSE constituent by market cap, and BP, also in the top ten, seeing peak-to-trough share price falls of c.60% and 57% respectively during the year to the end of June. Whilst oil has recovered somewhat from the cratered levels seen in April, it remains unclear exactly when demand will recover, and to what extent, hence oil shares have not been at the top of investors’ buying programmes, and this has weighed heavily on the UK market. Whilst Britain has always been a major centre for technological research and innovation, quoted tech companies do not make up a large part of our major stock indices, which has hampered the recovery, and which leads to the second topic …
What’s been going on in the technology sector?
It is clear from anecdotal evidence that not every company has suffered as a result of the global lockdowns of the past few months. Furloughed and couch-bound workers have boosted subscriptions to online services, such as Netflix, whilst those suddenly needing to work from home have depleted online retailers such as Amazon of all the requisites, such as printers, screens etc. There is no doubt that technology has been the clear winner during lockdown, as the performance of the passive L&G Technology Index tracker shows:
However, even within the technology sector, there have been winners and losers. The winning business models have been those that are based on SaaS (software as a service), streaming or online sales and any company that does not have a compulsory face-to-face element to its business model. So companies such as Google and Facebook, which not only make their money from online advertising, but have also seen greater usage, have done well, whilst those companies that specialise in other areas of technology, such as consumer goods, have not recovered to the same extent. Samsung shares, for example, fell by 37% peak-to-trough during the downturn, and were still almost 18% below their year’s high at the end of June. This is a classic example of a technology company that sells goods that not everyone is willing to buy unseen from an online retailer.
Outside of the main asset classes, investors still search for non-correlated returns to support their portfolios in times when everything seems to be falling. So the third question we address this month is …
Is gold still a worthwhile investment?
After the Great Financial Crisis, the price of gold rose steadily from $814 at the start of 2008 to over $1895 less than four years later in September 2011. In the past twelve months, gold has once again risen from just over $1400 to $1768 at the end of June. Despite crypto-currencies absorbing some of the worried cash that might otherwise have been poured into gold, the yellow metal has proven that it is still a perceived safe haven in times of uncertainty, and in the recent downturn, it displayed its defensive quality once again, as the table below shows:
Despite this impressive track record of riding to the rescue of panicked investors, it is not at all clear what gold is fundamentally worth. Warren Buffet is a vocal critic of gold as an investment, having once said that “It doesn’t do anything but sit there and look at you”. Indeed, gold has very little practical use, especially when compared to silver, which has a number of applications in technology and wider industry. On this basis, gold’s value is a function simply of demand and supply. There is a finite supply, and an ongoing consensus that it is worth buying, purely on this basis.
What we can say with certainty is that gold has been used as a store of value since before the Roman Empire, and is popularly held as a long-term hedge against inflation. whilst central bank support has helped equities and bonds, Gold is seen as a safe asset allocation given heightened uncertainty over inflation and the difficulty that central banks would have in withdrawing the huge levels of support for markets.
It is very difficult to get pure gold exposure, and we are constantly looking out for ways in which we can include gold in the portfolios. One way to gain liquid access to movements in the gold price is via gold mining shares. This is not an ideal way to get the exposure, because the investor does, inevitably, pick up some exposure to general equity market risk, but it does provide added diversification within the portfolio, and we can receive dividends from the companies that mine gold.
Disclaimer: The information contained in this report is for illustrative purposes only and should not be construed as a solicitation nor offer, nor recommendation to acquire or dispose of any investment. Specifically the share class used to create the illustrations may not be available on all platforms nor be suitable for individual investors. This report was produced by Independent Strategic Research Limited (ISR) for Affinity Integrated Wealth Management (AIWM) and while AIWM and ISR use reasonable efforts to obtain information from sources which they believe to be reliable, neither AIWM nor ISR make any representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are subject to change without notice. Model returns are calculated using the most appropriate share class of the underlying funds, having regard to the illustrative nature of the report, with all income being reinvested. As a result, real portfolio performance may vary from model performance. Where model portfolio histories are shorter than three years, historic model returns are substituted prior to inception date with returns from an ISR performance benchmark. This benchmark is constructed from the average returns of all ISR portfolios with similar risk profiles that existed during that time. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. Affinity Integrated Wealth Management is a trading style of Buryfield Grange Limited, Buryfield Grange Life Planning Limited and Affinity Integrated Wealth Management Ltd. ‘Buryfield Grange Limited’ is authorised and regulated by The Financial Conduct Authority. Not all services provided by Buryfield Grange are regulated by the Financial Conduct Authority. ‘Buryfield Grange Limited’ is registered in England and Wales at Inspire House, 20 Tonbridge Road, Maidstone, Kent, ME16 8RT. Company registration number 4568338. ISR is registered in England and Wales at 34 Southwark Bridge Road, London, SE1 9EU. Company registration number 09061794. Data Providers: Bloomberg L.P. and ISR.
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