Market Update 26 June 2020

Friday 26th June 2020

Stock markets have rebounded since the lows in March, but there is the fear of a disconnect between stock market returns and the economic downturn due to Covid 19 which ultimately will impact on Company profits especially in the first half of 2020.

For the recent rally in shares to hold, corporate profitability needs to recover in a time frame of 12-18 months. The resilience of stock markets in the last two weeks, is perhaps something of a surprise given there is plenty of evidence that Covid-19 is not yet under control in major countries such as Brazil and India, and seeing a resurgence in the United States. The most likely explanation for this resilience is that markets have been more focused on the shape of economic recovery as many regions come out of lockdown. The rate of economic recovery, albeit from very low levels and over a small time frame, has been better than expected.

Reasons to be cheerful

1. Quantitative Easing (QE) to infinity (and beyond) - Central banks will do whatever it takes to keep markets running, by keeping interest rates low and maintaining confidence in the system that there won't be a large scale corporate default. Low interest rates are generally good for shares and the sheer size of Quantitative Easing and different assets purchased has been huge.

2. What is the Alternative - Taking a mid to long term view, what else do you do with your savings? It's hard to see interest rates increasing for a few years and even then not by much. We see it with deposit accounts with the best 1 year fixed rate at 1.00% and only 1.7% over 7 years (source: Moneyfacts) and in terms of government gilts there has indeed been a negative interest rate offered recently.

3. Austerity is dead - Whether it is a $1 trillion infrastructure spend in the United States or Boris' "40 new hospitals", governments across the globe have signaled the end of austerity as they fight to prevent prices falling (deflation). Governments have begun a massive spend, granting loans, bailing out industries and paying furloughed staff to keep the economy bubbling along. The plan is to roll over their debts, hoping that they shrink relative to the economic growth (GDP) over time.

4. Cash to burn - Fund managers are sat on the highest level of cash since 2001. These elevated cash levels could provide a floor to the market as they look for opportunities and to 'buy the dips' with the expected volatility they will try to get back into the rising market.

As the UK starts to emerge from hibernation and return to the new 'normal' we are very much looking forward to resuming meetings with our clients again, however if they would still prefer to meet via video conference we are of course more than happy to accommodate this.