Please find below our Investment Market Update as at 31st July 2020.
Blue Sky Investment Market Update
What should we make of it all?
Poor economic data makes great headlines, especially if data is positioned as being the worst since the last recession, the worst in a decade, the worst in a century or the worst in 300 years!
The markets were spooked yesterday as new data gave investors something to worry about, at a time when there are concerns over the second wave occurring across the globe. The data was not good, but did we expect anything else?
I spoke about Technology earlier this week and despite the largest tech companies appearing before Congress, technology stocks responded positively as most beat analysts’ expectations.
It’s not all about equities of course. A well-balanced portfolio has a mixture of corporate and government bonds and they were the beneficiaries as anxiety came to the surface about the health of the global economy.
So, what was the negative data?
The US recorded its largest contraction in post-war history, shrinking at an annualised rate of 32.9% in the 2nd quarter. More to the point, it was a difference of 9.5% quarter on quarter, but it makes good headlines! To give this further perspective, the drop was smaller than the consensus predicted by economists.
European markets which have been performing well of late, regressed after data showed Germany’s economy contracted by 10.1% quarter on quarter. As with all developed nations, investment into business, imports, and exports, along with consumer spending were all badly hit.
It’s always dangerous to generalise
The word ‘markets’ is far too general to explain what is happening out there. When people in the UK comment on the markets, they often think of the FTSE 100. We have spoken on numerous occasions about how this index has become a concentration of stocks in certain sectors. When equities fall, you often hear the comment ‘the markets are down then’! The investment markets embrace all manner of sectors and assets. The bond market for instance is significantly bigger than the equity market.
This week the European equity fund sector lost 2.8%, from the 27th July to 30th July, yet the UK index linked gilt fund sector rose by 0.96%, as did the infrastructure sector. This creates a nice ballast to portfolios and serves to lessen any shocks.
Differentiating between data and investment markets
Data is backward looking and hence why we, as portfolio managers/advisers are not too worried by exactly what the actual percentages are to determine the extent of the issue. We are more concerned about the forward guidance.
Of course, when we read or hear about damaging economic data, particularly when there is an avalanche of it, we can understand why investors become anxious. Our job is to see through all this and absorb the forward guidance from companies when they report to the markets. In other words, respond to what we think is likely to happen moving forward. This is where our research capability helps enormously via our investment partners.
In simple terms, economic data is backward looking, and investment markets tend to be forward looking. That is why it is often best to invest when the news flow is at its worst. Very difficult to do of course, and as one client said to us this week. “Rather you than me. I don’t worry about it anymore, as I know you guys are on it”. Nice to hear!
Good news from the US
I’m not referring to Donald Trump attempting to delay the Presidential elections!
There is good news amongst the gloom. Ford’s operating loss was less than half what was predicted. UPS shares rose after their trading figures beat expectations. The same too for MasterCard and Visa. Procter & Gamble’s shares benefitted from stockpiling and the consumption of domestic products.
Then there are the tech stocks. According to Bloomberg, indices tracking the Nasdaq 100 jumped 1.8% following results from the big four. The Nasdaq has surged 53% in 91 days from 20th March. Here we go, the headlines work on the upside too! This was the fastest rally over an comparable time period since 2000.
Amazon’s profit raced past estimates by a country mile. The same for Apple. Facebook followed suit and increased their monthly active users. Only Alphabet’s revenue fell for the first time, apparently due to a fall in advertising sales but was still better than analyst expectations.
Today, equity markets across Europe have responded well to the US reports on earnings and just like US equities, they are now recovering some of the ground recently lost.
Managing expectations, and a thank you
After committing to two Market Commentary communications per week since March (5 months… can’t quite believe it), we have decided to revert to writing once a week about investment markets, and once every two weeks I will once again be writing my blogs. I can feel that my writing is gradually veering back to this format and it seems sensible to reconvene to where we were, in terms of communications, before the pandemic.
We’ve always taken great pride in our communications to clients and we believe it is extremely important to keep you abreast of what is happening. It is both a privilege and a huge responsibility to look after your money, and hopefully the twice a week markets updates have been a great reassurance during extremely testing times. The lovely comments from many of you suggest this has been the case.
We didn’t know what was going to happen after the devastating couple of weeks in March, but our experience gave us an indication of how the authorities across the world would respond. However, the size of the financial stimulus packages, I believe surprised most and make no mistake, this is why we have continued to be optimistic about the future direction of your investments.
Our message here is a big thank you to all our clients for your understanding and your support. With clients’ portfolios recovering well, we look forward to sharing good news with you in the future.
Best wishes
Gary and the Investment Team
RISK WARNING
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.
