June 2020 Commentary
It’s been a very strong quarter for equities as central banks and governments provided enormous amounts of stimulus and economies started to reopen.
As economies have started to reopen, economic data has shown signs of a sharp rebound. For example, US retail sales rose 17% month on month in May, while UK retail sales rebounded by 12%. While sales are still down 6% and 13% year on year respectively, the speed and magnitude of the bounce back is a clear positive.
The S&P 500 looks to be pricing in a V-shaped economic recovery, but it is worth noting that sector performance tells a more differentiated story. For example, online retailers are up very strongly year to date, while department stores are down sharply, along with other sectors that have been most affected by the virus, such as hotels, airlines, retail REITS, energy companies and banks. While most of the worst-performing sectors year to date have also lagged during the rally since late March, energy companies have actually been one of the best-performing sectors, as oil prices partially recovered. And some of the best-performing sectors year to date, such as food retailers and supermarkets, have lagged the most during the rally. So it is important to look beneath the index level for both opportunities and risks, and to be aware that many companies aren’t starting the second half of this year where they were at the beginning of the year, even though some indices may give that impression. Value stocks are down 17% this year, while growth stocks are up 6%.
Overall, the market has rallied on the back of fiscal and monetary stimulus, combined with the reopening of economies. We believe the monetary support is here to stay, but that in some countries there is a risk that fiscal stimulus may become less generous. Meanwhile, rising infection rates could lead to further social distancing measures being imposed or voluntarily adopted. We therefore favour a flexible and active approach to investing, currently with a focus on quality companies that can survive even if some of the risks do materialise in the second half of the year.
Despite May’s market rebound, considerable uncertainty remains over the trajectory of global growth over the coming quarters. A lot will depend on the extent to which economies can successfully reopen. For this reason, the investment managers remain prudent and expect further volatility. However, they acknowledge that the unprecedented policy response – particularly the willingness of central banks to intervene in credit markets – has shifted the balance of risks.
