Since our July update, the global stock market index didn’t move much: Towards month end, a correction more than offset an earlier rally. In the meantime, the Euro shows an upward trend against the USD, gold is at a new record high at >2,000$/ounce, and the trend of silver is even stronger (up by >50% this year).
What is behind it
Potential covid-19 vaccines seem to make good progress but there is still a long way to go.
Economic data look encouraging. July Purchasing Manager Indices in most western countries surprised to the upside, and there is also increasingly positive economic “hard data”: In the US, June retail sales were up by 27% vs April, with industrial production up by 7%. In Germany, industrial production increased by 9% just from May to June, with order volume up by 28%. On the negative side, consumer sentiment in the US was down in July which could mean a slower pace of recovery going forward.
The €750bn EU recovery fund addressing Covid-19 damage was received well by equity markets. Financed (for the first time) by EU common bonds, it is seen as a signal for a stable and more cooperative Europe, and for a stronger financial autonomy from the US, furthering the Euro’s potential role as a reserve currency. This gave the Euro a boost, together with the vaporising interest advantage of USD fixed income.
The development of the gold price is no surprise – see our Market Special from May.
What it will mean
In the EU, the recovery fund still has to take a number of hurdles including ratification on national level. Success will be crucial for the further recovery, and for the cohesion in Europe where Germany has fared better than most others. As one consultancy put it: “The eurozone is not only experiencing a huge shock but also an asymmetric one, with the most vulnerable countries . . . badly hit”.
In the US, the November elections start throwing a shadow. Joe Biden may try to reverse some of the recent tax reductions. And
Donald Trump’s tweeds may indicate that he would not accept a narrow defeat (“2020 will be the most INACCURATE & FRAUDULENT Election in history. It will be a great embarrassment to the USA.”) which could cause a constitutional crisis. Shorter term, the biggest concern in the US is the impact of surging infection numbers on the economy.
What to expect – and what to do
The recovery of equity markets since March has been impressive, and markets continue to look resilient. Over the next weeks, we should not expect much momentum from company news as Q2 reporting is largely behind us. GDP growth figures will look bad but that shouldn’t be a surprise anymore. The recovery has started, and we anticipate strong growth for Q3, followed by a further recovery at somewhat reduced speed.
A further strengthening of the Euro would impact the performance of USD based investments and also be a concern for European exports. We think this is a credible scenario – but we don’t expect it to happen in a rush. However, we observe some warning signals particularly in the US. Recent advances of US stocks were largely driven by a rather small number of technology companies, and valuations start to look ambitious: On the basis of 12-month profit forecasts, US stocks show a 50% premium compared to a 20-year average. This needs to be seen in the context of historically low interest rates – long term there is no alternative to equity. But we suggest a bit of caution in the short term and wouldn’t be surprised by elevated levels of volatility.
Markets tend to be less sanguine in summer, and a correction would be quite healthy at this point. Ultimately, it may not take place as abundant liquidity keeps driving prices. But asset management is also about patience, and about dealing with uncertainty. Whilst previously we have been overweight in US stocks, we have scaled that back a little. Some profit taking from our silver investments has also added to liquidity as the silver market seems rather overheated in the short term. Still, precious metals remain important pillars of our portfolios and we believe that our clients will continue to benefit from a thoughtful, diversified asset allocation.
We wish you a pleasant summer, and if you are taking a holiday: Please return in good health!
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