Investment Office Second Quarter Update 2020

3 mins read

StJohn Gardner

Chief Investment Officer

Welcome to our report on the second quarter of 2020 and our outlook for markets.

Global equity markets have participated in a strong rally following the March 2020 COVID-19 sell-off. Helped by ample liquidity and unprecedented fiscal stimulus initially, this was followed in late April and early May by observations in China (and Asia generally) of success in the restarting of economic activity there and thus how Europe and the US might follow suit. Italy, having been the first western region to be hit by the virus, began reducing its severe restrictions with other countries then beginning to follow their lead such that, during June, almost all western economies had clearly articulated plans for staggered re-openings. Markets have now retraced the majority of their losses.

Indeed, the pandemic has very much had the effect of favouring some industries over others and thus regional stock market returns have not solely been driven by perceptions of how well their respective governments are handling the crisis, but more so by the industries in which their stock markets have a predominance of companies. This was particularly evident in contrasting the S&P 500, with its focus on flourishing technology, communications and logistics giants versus the FTSE 100 with its bias towards banks, oil and mining in an environment where banks were suffering from falling interest rates and bad loan provisions, and oil and mining were impacted by the slowdown in global economic activity. As a result, the US markets are hitting new highs whereas the UK stock market has only recovered half its losses since March.

Asset prices remained rocky throughout the entire quarter. Early in the period, investors watched in horror as the worsening US jobless figures were unveiled each week; albeit markets were somewhat looking through the data given the furlough and generous unemployment support packages. Adding to the volatility were the localised resurgences of infections, which led to fears of a second round of activity lockdowns and a W rather than V shaped recovery. Texas, Florida and Arizona all re-imposed restrictions and Leicester became the first UK city to undergo special measures.

Furthermore, the ongoing tariff war being waged by President Trump provided additional unsettling news flow. Investment managers adjusted their analytical processes towards an era governed not by the maximum profitable efficiencies of globalisation, but instead of national independence through the bringing home of industrial production regardless of the economics, assisted through a system of protectionist price tariffs. Exports remained well below long-term trends with countries like Japan particularly impacted. Brexit negotiations have made the front pages of UK newspapers once more and proved a headwind for sterling, albeit, given our global approach to investment and being mostly unhedged in our equity exposure, this assisted returns for sterling based portfolios.

In June, we began to see a pick-up in positive data across the globe. The numbers being added to job queues abated, retail sales and consumption figures recovered somewhat, perhaps aided by VAT cuts in some nations (particularly in Europe) and many Purchasing Managers’ Indices retraced some of their previous declines. Japan’s manufacturing PMI in June, however, was disappointing. EU sentiment indicators also picked up markedly although a little short of expectations. Indeed data often came in slightly worse than the market had so positively budgeted, but the markets shook this off given the known difficulties of prediction in scenarios

without precedent such as those in which we find ourselves. On the negative side, China has been flexing its muscles with heavy-handed legislation to impose greater control over Hong Kong, possible cyber-attacks and corporate espionage against the West, and incursions into neighbours’ land (India) and airspace (Japan).

To read StJohn’s full update, including his outlook, summary, total asset returns and currency pricing, please click here.