LGT Vestra Quarter 2 2020 - Market Review Summary

Thursday 30 July, 2020

Whilst there has been a sharp recovery in markets, the dispersion of returns this year has been extraordinary. After the strong second quarter, the S&P 500 is down just 3% for the year. With the pound falling over that period, that translates to a positive return for sterling based investors. By way of contrast, the FTSE 100 Index returned just 9% on the quarter and was down 16.8% in the first half. The UK market consists of more resource and fewer technology stocks than the US market. The dispersion between geographic based indices has been large, but the dispersion between styles and stocks has also been extraordinary. Growth stocks have massively outperformed value. In the US, the Russell 1000 Growth Index was up 9.8% in the first half, meanwhile its value counterpart is still down 16.2%.  

Within these indices there have been stark differences in returns; some companies have benefited from the change in lifestyle, whilst others have suffered dire consequences as a result of the lockdown. Non-essential high street retailers have suffered, and many are closing down. However, retailers with a strong online presence have still benefited from the restrictions. As an example, Amazon’s share price has risen 49% in the first half of the year.

Q2 2020 index performance (local currency)

Source: FE analytics

Government bonds have benefited from lower interest rates and a flight to quality this year. Corporate bonds suffered in March alongside equity markets, but have since recovered, supported by central bank buying and moves by companies to shore up their balance sheets. In addition to central bank support for bond markets, there have been huge fiscal measures to try to support the economy through the crisis. Schemes such as the Paycheck Protection Program in the US and the furlough scheme in the UK have prevented the rise in unemployment from being much steeper than it could have been. In Europe, individual countries have taken substantial steps, but the European Union continues to debate the proposed €750 billion recovery plan.

Looking ahead

As we enter the second half of the year, the COVID-19 situation appears to be improving in many parts of the world, although with notable exceptions. Whilst some areas of the US are getting better, the overall picture is still dire. In some areas, for example Texas and Florida, intensive care units are reaching full capacity. In the UK, we have seen a renewed lockdown in Leicester and can expect other hotspots to emerge in the months to come. On a more positive note, as we are learning more about the virus, we are seeing greater progress in terms of both treatments and the development of a vaccine. Strict lockdown measures have proven an effective method in reducing the spread of the virus, albeit they come at an enormous economic cost.

Away from COVID-19, in the second half of the year the US presidential election will be a focus for investors. Trump’s handling of the pandemic and the resultant economic recession has seen his standing in the opinion polls fall sharply. At present, Joe Biden is the favourite, but he has not had a strong campaign. The new virus infections are now concentrated in states that voted Republican, rather than Democrat, and therefore we may expect a vigorous response from Donald Trump.

In the UK, the deadline set in UK legislation for an extension to the Brexit transition passed at the end of June. There has been little progress on the post-Brexit trade talks, with regulation and fisheries still major blockages. As we move towards the year-end, it may focus minds but with governments occupied with the pandemic response, making any progress may be difficult.

The pandemic has accelerated many trends that were already in place. Online shopping, flexible working from home, less business travel and the use of video conferencing amongst them. This has led to an enormous dispersion in returns. Economically, there is talk of V-, W-, U- or L-shaped recoveries. Within individual companies, we will no doubt see all of these over time. As markets continue to balance the economic slowdown with fiscal and monetary stimuli, we expect volatility to be high and the dispersion of returns to be wide. We therefore continue to prefer a selective approach to equities and corporate bonds.

This document is a marketing communication which is provided for informational purposes only and is intended for confidential use by the recipient. The information presented herein is insufficient for making an informed investment decision. This document is considered to be a general market commentary and does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. 

This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any investments. You are recommended to seek advice concerning suitability of any investment from your investment adviser. 

Past performance is not a reliable indicator of future performance; and the value of investments, as well as the income from them can go down as well as up, and investors may get back less than the original amount invested.

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