The Multi-Asset Process

June 2020 Market Review

Looking back at the first six months of 2020, it is hard to know where to start, beyond the fact we are living in historic times and many people probably feel they have squeezed a few lifetimes into such a short period.

Although countries around the world are easing their way out of lockdown, it seems clear that, economically at least, things will get worse before they get better given the scale of upheaval. Talk of a V-shaped recovery has all but disappeared and there is a growing consensus that it may take until late next year or even 2022 before we get back to 2019 levels of real GDP and bear in mind that was after close to a decade of fairly anaemic growth.

As we have continued to stress, there remains huge uncertainty about the weeks and months ahead but with World War Two in the headlines over June, as Vera Lynn passed away and Churchill (or at least his statue) proving as divisive as ever, we hope things are at least at the end of the beginning, to quote the latter. As Covid-19 cases surpassed 10 million globally, we certainly hope that is the case.

A broadly flat month for equities included a couple of dips on fears about fresh waves of Covid cases, particularly in the US, before further fiscal largesse from the Bank of England and Federal Reserve proved enough to steady nerves. In a period of trillions, this latest activity went under the radar to some extent but saw the Bank of England pledge another £100bn-plus in quantitative easing while the Fed began its bond buying programme and made other commitments on infrastructure.

As expected, worrying data is beginning to filter through and we will have to get used to breaking unwelcome records over the next few months. In the UK over June, we saw a 20% drop in month-on-month GDP figures for April and the worst quarterly fall since 1979 in Q1, which will hopefully prove the nadir. Not all parts of the economy are reopening simultaneously and restaurants and pubs certainly sit in that ‘worse before it gets better’ camp while social distancing remains in place. ONS figures also revealed the UK’s borrowing exceeded GDP for the first time since 1963 over April and May, with the £103.2bn figure an eye-watering £87bn more than during the same period last year.

After the weakest growth on record in Q2, we would pause to highlight some work from UBS, questioning GDP as an accurate measure of living standards. To summarise, the report said Covid-19 is likely to accelerate a fourth industrial revolution and with more people working at home, companies need to invest less and the economy is working its stock of assets harder. While this nominally hurts GDP, living standards are not negatively affected and company earnings should improve as costs fall something to consider as poor growth figures continue to roll in.

Data on sentiment (from Bank of America Merrill Lynch’s monthly Fund Manager Survey) continues to highlight the dichotomy at play in markets. While risk appetites appear to be surging and cash levels are falling, and the report said Wall Street is now ‘past peak pessimism’, the highest number of managers since 1998 now believe the stock market is overvalued.

One of our favoured commentators, Howard Marks from US investment firm Oaktree, discussed the market’s capacity to look across the Covid-19 ‘valley’ in June, voicing many of the questions that continue to trouble us. Much of this surrounds the market’s surge since March and apparent blanket acceptance that things are moving in the right direction: in many of our 2018 and 2019 presentations, we talked about FOMO (fear of missing out) conditions but more recently, this seems to have shifted to a YOLO mindset (you only live once, for readers over 25). Markets and investors are failing to weigh the positives and negatives of current conditions dispassionately, with policy easing and liquidity injections seen considering far more important than ongoing uncertainty, and, for us, that has to call the longevity of the rally into question.

Elsewhere, June marked the fourth anniversary of Brexit and we should remember that even if the Covid picture is looking better in autumn, and we manage to avoid a second wave, we have the potential for months of further wrangling with the EU. There is also a generational US election to come and that other favourite pre-Covid topic raised its head over the month, with comments from Trump adviser Peter Navarro on the US/China trade deal being ‘over’ spooking markets. Trump himself took to twitter to assure people the deal is intact and Navarro amended his comments to claim he was talking about a general lack of trust in China after it ‘foisted a pandemic upon the world’. Hardly remarks to reassure anyone about a long-term deal between these superpowers and this area demands close attention as we move towards the election.

As outlined, we continue to believe markets are running substantially in advance of fundamentals and this disconnect had tempered our desire to increase risk on the portfolios despite the opportunity recent months provided. We would not expect another collapse as in March, however, given the level of state intervention and ‘whatever it takes’ attitude. With further evidence of this over June, we began adding risk to portfolios (within our parameters) as the first steps towards getting to our target allocations. For full details of this, see our quarterly portfolio-specific commentaries, but overall, we made a number of shifts to dial up volatility.

We increased US small caps towards our target TAA, for example, an asset class that has been out of fashion amid the rise of the FAANGs but is rebounding post crisis. We also added to Asia ex-Japan and emerging markets, which continue to offer attractive value. Within bond exposure, we partially switched into global index-linked to increase inflation protection as prices are expected to rise in the medium to longer term. We also partially switched into global high yield, which offers a more attractive risk/return and greater yield than investment grade credit. On the higher-risk models, we removed all commodity exposure on the view that the global economic recovery will be gradual and uneven and demand will therefore be limited.


We continue to believe longer-term outperformance trends in terms of value versus growth, emerging markets versus the US and small caps versus large (all of which have reversed in recent years) can re-emerge and have already seen short runs for value and smaller companies in recent weeks. While limited, these show how quickly things can turn and we maintain that portfolios able to tilt between these while ultimately keeping a foot in both camps offer a compelling and diversified risk/reward balance.

For a comprehensive list of common financial words and terms, see our glossary here.

 

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Wednesday, July 8, 2020, 12:06 PM