The week of 8 June saw markets start off strongly with the S&P 500 rising above its year-to-date losses due to COVID-19.
The dovish approach was clear in the Fed’s statement on Wednesday 10 June, which highlighted that it expects interest rates to remain close to zero until at least the end of 2022, and it would continue to increase its government debt holdings “at least at the current pace to sustain smooth market functioning”. The support is on the back of its expectations that the US economy will contract by 6.5% in 2020, and unemployment will remain high, although fall to 9.3%.
Meanwhile, the chances of a second wave of the virus increased as seven US states announced their highest, or near highest, number of new cases since the start of the pandemic. These states, which include California, Florida and Texas, now account for around 46% of new cases nationwide, and are the states previously criticised by health officials for reopening too quickly.
US weekly initial jobless claims came in at 1.5 million last week, and while this was down from almost 1.9 million in the previous week, the announcement marks the tenth consecutive weekly decline. The report also highlighted that the number of people actively collecting benefits, i.e. continuous claims, fell to 20.9 million or 14.4% of the workforce. Last week’s US consumer price index number showed a fall of 0.1% in May versus April – the third straight month to see inflation dip lower.
The UK economy, meanwhile, shrank by 20.4% in April, its fastest monthly decline on record, as the coronavirus lockdown hit demand and economic activity in all sectors.
Brexit is also back in the headlines as the UK formally rejected the option to extend its post-Brexit transition period, leaving the door open for a no-deal outcome if an agreement is not reached by 1 January 2021. Progress to date has been slow, but the two sides have now agreed an intensified timetable for free-trade negotiations, with talks due to take place each week during July.
Eurozone industrial production numbers were also weak, falling 17.1% in May. This coincided with some good news, as the European Central Bank (ECB) announced a €600 billion expansion, and a six-month extension to 30 June 2021, of its pandemic emergency purchase programme. The market was disappointed, however, not to hear from the EU on an agreement to its fiscal plan.
Across financial markets, this news led to increased aversion to risk for all asset classes.
With regard to equities, the MSCI AC World was down -4.0% in sterling terms, and -4.5% in US dollar terms, over the first four days of last week, while Friday saw a slight recovery in late US trading.
The best performers were Japan (+1.5%), Emerging Markets (-0.9%) and Asia ex Japan (-0.5%). The US (-5.8%) and the UK (-6.5%) were the weakest.
Sector performance was also consistent with the broader aversion to risk, which led to the outperformance of the defensive sectors of IT (-2.7%), communication services (-2.8%) and consumer staples (-2.4%). Meanwhile, energy (-9.9%), financial services (-7.7%) and industrials (-6.6%) suffered. In line with these trends, growth (-1.99%) did better than value (-6.07%), and large capitalisation stocks (-3.81%) fared better than small capitalisation stocks (-6.10%).
Within bonds, the same flight to quality could be seen through the appeal of sovereign bonds versus corporate debt, and a widening of spreads between the risk rating bands, with the higher-rated bonds outperforming.
Our alternative investment trusts saw mixed performance. In the absence of any particular headlines, all but two drifted lower. They were, however, more resilient than mainstream equities.
What’s happening in portfolios?
Last week’s meeting of the strategic investment committee saw the main focus of the discussion centre on equity markets and our above-normal cash reserves.
While there has been a strong recovery in the US market, it is not extensive – even in the US – and has only benefitted a narrow band of the market. Many areas have been left behind, including value and cyclical stocks, and emerging markets etc.
This has all happened at a time when most announcements on the state of the economy have come in worse than expected, and we’ve seen the continual tempering of expectations for growth and earnings’ forecasts going forward.
We believe the action of central banks seems to have instilled a view that the support will be there come-what-may, and so investors have looked at equities and dismissed any alternative approach. However, we do not believe now is the time to increase risk levels and, as such, we will be looking at our various targets and tabling more discussions as to the right approach for the long-term benefit of clients amid short-term noise.
Events this week
This week sees the US releasing more May data, with retail sales and industrial production figures out on Wednesday 17 June. Meanwhile, here in the UK, inflation, retail sales and unemployment data will be published this week, as will a decision by the Bank of England as to whether it needs to extend its quantitative easing programme in the short term.
The Bank of Japan announces its latest monetary policy decision on Tuesday 16 June, although no major news is expected.
The European Council summit on Friday 19 June will see EU leaders discuss the COVID-19 recovery fund, along with the EU’s new long-term budget.
Brexit will also continue to be in the headlines with Boris Johnson due to meet with Ursula von der Leyen, and other senior EU officials, in the hope of providing fresh impetus for the trade negotiations – especially since the UK and the EU would both suffer economically from a hard (no-deal) Brexit.
Clients of Nedbank Private Wealth can get in touch with their private bankers or relationship managers directly to understand how their portfolios are responding to market events or call +44 (0)1624 645000.
If you would like to find out more about how we can help you manage your investments, please also contact us on +44 (0)1624 645000.
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Based in our Isle of Man office, James is responsible for delivering the end-to-end investment management process, overseeing the implementation of the Nedbank Private Wealth house view within our discretionary managed portfolios, and for developing our investment proposition.
He has over 18 years’ investment experience and has been responsible for the Nedbank Private Wealth managed discretionary portfolios since 2007. James holds the Certificate in Investment Performance Measurement from the CFA Institute.