Please find below our Investment Market Update as at 21st July 2020.
Blue Sky Investment Market Update
Beginning to gain some traction
Equity markets picked up last week, partly because of hopes around finding a vaccine for the Covid virus but also because this part of the earnings season in Europe has been pretty positive. Add into the mix the agreed bailout plan in Europe and it’s no wonder the markets have responded positively.
There has been lots of reports around the relative success of testing and trialling drugs which will arrest the virus, but none yet conclusive. However, this has given equity markets a boost.
On the earnings front in Europe, 64% of companies out of 36 tracked have topped estimates according to Bloomberg. Conversely, only 18% missed expectations. Whilst this is good news and has bolstered the performance of European equities, it is important to understand that full year earnings estimates were reduced by nearly 30% this year, making market expectations easier to beat.
The European bailout is finally agreed
At last, a deal has been struck by EU leaders whereby they agreed to move ahead with huge borrowing from the capital markets for the first time. It wasn’t all plain sailing and concessions had to be made to drive through the 750bn Euro package. The recovery fund is divided with 390bn Euros being earmarked for grants to economically weakened states, particularly Italy, but this was a smaller sum than the 500bn Euro package proposed a couple of months ago.
However, the markets liked it with the Dax index in Germany responding with a 2% uplift. It was reported in the FT today that an economist at Morgan Stanley commented “We see the recovery package as a game changer for Europe, supporting a synchronised recovery and stronger growth over a sustained period, while making monetary union and the Euro more attractive”.
Technology stocks bounce back
As we know, technology stocks have led the way in the rally but, recent events have reminded us that performance in this sector is laced with volatility.
Last week Netflix shares fell by 9.1% in one day. Perhaps in some ways this isn’t a surprise as people get off their sofas and return back to work. Amazon also reminded us of how dramatic some of the swings in price can be, falling by circa 7% last week and then rising by nearly 7% yesterday. These movements are interesting because it has been argued in some quarters that technology stocks no longer embrace a ‘high risk’ badge because technology is increasingly shaping how we do things, particularly due to the outbreak of Covid.
I will write about this again in Friday’s update entitled “what is risk”.
An ‘us and them’ scenario
There is no doubt that not having a technology exposure will have hampered returns for anyone investing. We only have to look at the Dow Jones and the S&P 500 and the differential in the returns from March to reinforce this. The S&P 500 now has circa 25% of its holdings in pure technology companies and even higher if we include other companies which have a technology arm are taken into account. The low exposure to technology companies in the FTSE 100 is one of the reasons for it lagging the major indices.
Enjoy the sunshine.
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.