Recognisable Structures in Wolverhampton

Monthly Market Outlook June/July 2020

Monthly Market Outlook Article

Whilst the restrictions implemented due to COVID-19 have caused a collapse in economic activity, there has been a sharp recovery in equity markets from the falls experienced in the first quarter of the year. At the same time, the dispersion of returns between geographies, styles and stocks so far this year has been extraordinary. Government bonds have benefited from lower interest rates and a flight to quality; whilst corporate bonds, having suffered in March alongside equity markets, have since recovered, supported by central bank buying and moves by companies to shore up their balance sheets.

As we enter the second half of the year, the rate of infection has declined in many parts of the world. However in the US, cases in certain states have been increasing at an alarming rate, and some emerging markets appear not to have a handle on the situation either. Trump's handling of the pandemic has led to a fall in his polling ahead of the November election. The Democratic candidate, Joe Biden, is now showing an increasing lead in a number of polls. Given the outbreak is now impacting mostly Republican states, the response to this may be a crucial determinant of the election outcome.

In the UK, Chancellor Rishi Sunak announced a further £30 billion stimulus package, to support youth employment in particular, as the furlough scheme is due to wind down in October. Thus far, the schemes implemented have helped 11 million individuals across the UK, representing over a third of the working population. However, major retailers, such as John Lewis and Boots, have already announced redundancies suggesting that there are still likely to be job losses in the future despite the Government's efforts to support employment. This is likely to have caused the Chancellor's recent actions, and we expect will push other politicians around the world to take further action in the months to come.

In Europe, the European Union continues to debate the proposed €750 billion recovery plan. Whilst coordinated action remains difficult, President Macron announced a further €100 billion in additional aid. Brexit trade negotiations continue with the EU and UK looking as far apart as ever, with no progress on key sticking points. The deadline set in UK legislation for an extension to the Brexit transition passed at the end of June, but EU leaders appear to be talking of discussions going on to October.

Whilst cases have risen in the US, treatments appear to be more effective and the proportion of people dying as a result of the virus has been a lot lower. We are also seeing positive progress in the development of a vaccine. Strict lockdown measures have proven an effective method in reducing the spread of the virus, albeit at an enormous economic cost. However, as markets continue to balance the economic slowdown with fiscal and monetary stimulus, we expect volatility to be high and the dispersion of returns to remain wide. We therefore continue to prefer a selective approach to equities and corporate bonds.

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