Over the month of July equity markets were mixed given renewed incidences of the coronavirus
Covid-19 and concerns over its continued economic impact. This was in spite of further commitments
from governments and central banks to deal with the crisis as well as some encouraging results from
those companies benefitting from resilient business models or improving trends. A degree of
uncertainty over the outlook is likely to bring higher volatility and a focus on defensive assets.
The difficulty of containing the virus has been more apparent after an increase in cases in a range of
countries, including those that had already struggled, such as Spain and the USA, and others such as
Vietnam that had controlled the pandemic well; even North Korea admitted to a victim. There have
been discouraging numbers from the likes of Australia, Brazil and Russia, too. The more positive
indications came from early encouraging results from vaccines under development and a more
comprehensive set of testing.
The resurgence in the initial wave and the threat of a second wave of infection have brought an end to
the most ambitious plans to end the lock-downs in place and no end of confusion over the exact
status in the UK, as elsewhere. Any delay to the easing of restrictions when combined with doubts
over their future imposition dampens demand, not only in the tourism sector – which is important in
itself, accounting for 12% of the economy in Spain and 7% in France, the countries which receive most
visitors. This limits the scope for any sort of V-shaped recovery and increases the probability of high
unemployment; in the UK the National Institute of Economic and Social Research has forecast a rate
of 10% at the end of 2020.
The support has continued from central banks such as the US Federal Reserve, which first extended
its emergency lending programme and then committed to maintain its current policy of asset
purchases. The Republicans in Congress have been working on an additional stimulus programme
worth a combined $1trn, while the Democrats have a rival set of priorities. The European Union
summit agreed (after some typically tense negotiations) a new budget worth €1.1trn over seven years
and the Next Generation EU €750bn recovery fund, which is worth a little under 5% of the Union’s
GDP. The fund is novel in that €390bn will be available as grants and not as loans, while the
European Commission itself will take on a high level of debt, if not yet debt of individual countries
(which would have been a Hamiltonian moment, not named for a grand prix driver or the musical
but for the US leader’s assumption of state debts in 1790).
This seems to be a time when the strong thrive and the weak struggle, with limited scope to see any
of the levelling of the position that might seem equitable. US banks made huge profits out of trading
in volatile markets in spite of the type of provisions for bad debts that took Lloyds and Santander to
heavy losses. The large US technology companies announced substantial increases in revenue even as
they faced questions in Washington over their apparent dominance and even as they start to compete
with each other. It is also a time when earnings can be elusive and ratings seem not to matter.
Markets are mulling over a combination of two-way pulls, over the likely course of the virus itself
alongside its economic impact and over the likely implications of the measures taken by central banks
or governments and their sustainability. There are potential benefits from greater spending on
infrastructure and from well-directed state support, as well as from the substantial increases in the
balance sheets of central banks. The numbers do look daunting: on government borrowing, which the
IMF has forecast will be 17% of GDP for rich countries to cover $4.2trn of stimulus and tax cuts this
year; on the size of central bank reserves, with an additional $3.7trn in the US, UK, the eurozone and
Japan; and in the support for companies – the US Federal Reserve and Treasury now stand behind
some 11% of US corporate debt. This new structure has been dependent on low inflation and low
interest rates, which makes debt affordable for now; for example, in Italy debt is over 150% of GDP
but the cost of servicing it might be as low as 2% of GDP. But there are inflationary pressures that
might bring higher rates and greater challenges, against which defensive assets have gained in
appeal. The price of gold in particular has reflected the risks and gained lustre, benefitting from the
low or negative real interest rates that have weighed on the US Dollar.
In the UK the FTSE 100 fell by 4.4% over July to end at a level of 5898, while mid-sized companies in
the FTSE 250 index saw a smaller decline of 1.1% and the FTSE SmallCap index was off 1.4%. The
FTSE AIM All-Share managed a small gain of 0.1%. The FTSE All-Share return including income was
-3.6% in the month.
In the US the S&P 500 rose by 5.5%, helped again by the strength in technology shares which saw the
NASDAQ index gain a further 6.8% so as now to be up almost a fifth for the year to date. The more
concentrated Dow Jones Industrial index rose 2.4% and smaller companies, as represented by the
Russell 2000 index, were 2.7% higher. The weakness in the US$ reduced returns to investors in
In Europe the EURO STOXX 50 was down 1.9% in the month, with the German market offering some
resilience while the Euromoney index of smaller companies gained 0.5%. In Japan the Nikkei 225
index fell 2.6%.
The MSCI Emerging Markets index in US$ again did well in the month with a rise of 8.4%, helped by
a rally in a range of markets, with Shanghai up 10.9%. The Hang Seng index in Hong Kong saw a
marginal gain of 0.5%. The MSCI Frontier Markets index was 1.1% lower.
In the bond markets the UK 10-year gilt yield was lower at 0.1% as against 0.17% at the start of July
and the total return for the FTSE Gilts All Stocks index was 0.41% in the month. In the US the 10-year
yield also fell, moving from 0.66% to 0.53%, while in Europe yields were also lower, with the 10-year
bund in Germany down from -0.45% to -0.52%. The month saw positive returns across a range of
fixed interest indices.
Sterling was up 5.5% over the month against the US$, as that currency came under pressure, and
closed at a rate of $1.31:£. Sterling was also 0.6% stronger at €1.11:£ against the euro, which reached
its highest level against the US$ in two years. The price of gold ended the period up a further 10.9% at
$1976 per troy ounce, showing its defensive attraction and given significant demand from gold funds.
The price of Brent oil was again higher and closed up 5% over the month at $43 per barrel. The main
metal prices were all higher, as was the more speculative silver, while agricultural commodities saw a
better month. The Vix index gauge of expected volatility in the US market fell by nearly a fifth in the
Julian Cooke – Director 3rd August 2020
Vintage Asset Management
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