Market Summary by Brooks Macdonald - August 2020

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Global equity markets have seen gains over August but they have been contained by a tug of war between the positives of corporate earnings and vaccine hopes, and the negatives of US/China tensions and fears over a second wave of COVID-19 infections.

As of 21st August, just shy of 90% of US companies had reported their results for Q2 2020, of which 83% beat market expectations, showing a strong upside versus rather downbeat estimates. Our preferred sectors of Health Care and Technology have both seen over 90% of companies report earnings ahead of estimates alongside showing resilience in the face of a tough quarter for global economic activity. The degree of these results in some part reflects the positive surprises to economic data in June which were not reflected in analyst numbers. Regardless, this helps to provide a support to equity valuations.

At a time when the US COVID-19 case growth is beginning to slow, European cases are gaining momentum. Regardless of the extent of viral case growth expansion, governments will be hoping that the rate of fatality trends below that of the original wave. This suggests two things, firstly society is getting better at shielding the most vulnerable with most new cases in a far younger demographic; secondly the global healthcare system has become far better at tackling the virus with improvements in approach as well as the drugs to help those most affected by COVID-19. Ultimately, expectations around consumer confidence and economic activity returning to normal is predicated on a removal of COVID-19 from general circulation. At the moment, this only looks likely through a vaccine and we have seen positive developments here, both in terms of the successes of some of the leading vaccine projects but also the fact that a range of vaccine approaches are seeing heightened immune responses.

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As the US election approaches, we expect politics to play an outsized role in defining equity sentiment, particularly during the traditionally quieter month of August. There is a real possibility of the next US fiscal stimulus package being pushed back to after the August Congress recess. This has catalysed President Trump to use executive orders to provide some stimulus into this void. There is a populist tone to these actions given they are pitched as pushing past the bureaucracy of Congress to deliver for Americans. Expect this political angle to lead to further impasses between Congress and the White House as the summer continues. We also expect political risks to remain elevated between the US and China with a possible flashpoint this weekend as talks over the success of the Phase One trade deal begin. Markets are still trying to weigh up how far Trump and the White House might go with any reescalation of tensions. While there is clearly political capital accrued in being seen to be tough on China, there will be concerns that increased tensions may damage the US economy which is in the early stages of restarting post-Coronavirus. Our base case is that rhetoric will rise as November approaches but there is limited upside for President Trump creating equity market volatility ahead of the election.

We continue to believe that equities are structurally supported by the equity/bond differential. With US interest rates at 0-0.25%* and US Investment Grade bonds at 2%**, the financial world looks very different to how it has in the past. Even with the current level of valuations, the US Equity market yields 4.3%*** (based on earnings expectations for the next year). The reality is that there are no free lunches out there and even prior to the COVID-19 stimulus, the extensive central bank liquidity this economic cycle means there is plenty of cash looking for a home. US Equities are certainly not cheap on an absolute basis or versus history but until bonds can offer a yield that compensates for interest rate risk and inflation, surges of COVID-19/US-China volatility aside, the relative attraction of equities is likely to stay intact.

Important information

The performance indicated for each sector should not be taken as an expectation of the future performance. Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a reliable indicator of future results. Investors may not get back the amount invested. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Investors should be aware of the additional risks associated with funds investing in emerging or developing markets.

The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others.

Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies.

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This article does not constitute advice, should you require advice or further information please contact your usual consultant. Alternatively, you can contact us via telephone on 02476 388 911 or by email to [email protected]. We are available Mon - Thursday 9am - 5pm and Friday 8:30am - 4:30 pm.

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