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Weekly investment update – 22 July 2020

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Marina CHERNYAK
 

Activity and mobility data continue to normalise despite implementation of local lockdowns in several regions. Consumer data show some resilience with the latest US retail sales rising by more than expected even as the recovery in unemployment rates slows.

New cases of COVID-19 surge in the US….

The situation continues to deteriorate in the United States. The seven-day moving average of the number of new cases recorded each day is now running around 67,000 cases, more than 3 times the level recoded just a month ago.

The now familiar “hot spot” states in the South and West of the US continue to report test positivity rates, and it is likely that the data understate the true spread of the virus given the long waiting times for results and test kit shortages.

This upsurge in cases, hospitalisations and fatalities across the US has forced a response: 22 states, which account for more than 55% of US GDP, have either put re-opening on pause or have actually gone into reverse. The high frequency data suggest the public are moving ahead of the politicians: retreating from public spaces on a voluntary basis to reduce their risk of catching the disease, regardless of whether governments mandate social distancing or not.

A mixed picture elsewhere

Away from the United States, some countries that appeared to have the virus under control have reported new spikes in infections. Indeed, in some instances (Hong Kong and Israel), the new cases have surpassed the early peak in the spring pointing to a more sustained outbreak. However, in contrast to the first wave, when cases were primarily imported from abroad, it appears that these new spikes in infections reflect more substantial community transmission.

In Continental Europe, the virus remains largely under control. As such, mobility continues to improve, led by France. Spain is a laggard due to re-imposition of mobility restrictions, as reflected in the Oxford Stringency Index where Spain once again is recorded as having the most restrictive policies in EU-4.

In terms of progress on vaccine, there have been two important developments this week: the Oxford University research team and a CanSino Biologics team in China published peer-reviewed results from their early-phase human vaccine trials, clearing the way for the efficacy trials. Both groups reported significant immune response in the form of neutralising antibodies and T-cell responses with what seems to be minimal side effects.

At a World Health Organisation briefing on Monday, Mike Ryan, who heads the group’s health emergencies programme, welcomed the achievements adding that while it is a positive result, “there’s a long way to go… these are phase one studies. We now need to move into larger-scale real-world trials.” According to a survey of investors, more than half of market professionals expect a vaccine over the next 6-12 months – so some of the vaccine optimism seems to be priced in.

Economic data – resilient consumer spending

The key data release last week was US retail sales. Retail sales rose 7.5% on the month, beating expectations (5%) handsomely. Growth in headline retail sales is now positive on a year on year basis and the level of sales is only marginally below the February level. In short, this key high frequency indicator of expenditure looks decidedly V-shaped. However, first impressions can be deceiving. Retail sales provides an incomplete picture of overall consumption. Expenditure on consumer services is not captured and spending in this category has been disproportionately impacted by social distancing.

Moreover, we should probably expect to see a transitory increase in spending on consumer goods as lockdown ends, with households replenishing stocks of semi-durable and durable goods and some degree of substitution of expenditure towards goods out of categories where spending is constrained (e.g., eating out or taking a vacation).

Nonetheless, the resilience of consumer spending is a genuine feature of this recession, explained in our view by the unusual and muscular fiscal response. When unemployment rises in a recession, disposable income typically falls and so does consumer spending. In this recession, finance ministers have gone to great lengths to support the incomes of the large numbers of people who have been furloughed or lost their jobs. However, that support will not last indefinitely and at that point spending may falter.

Markets – a positive backdrop

  • European leaders reached an agreement on a EUR750bn recovery fund, with grants amounting to EUR390bn and loans of EUR360bn. The agreement is positive news for European economies as it dispels uncertainty and is expected to speed up the recovery of weaker eurozone economies.
  • In the US hopes for a supplemental USD1.3trn stimulus package have been supportive of price action in risky assets. A lot however depends on whether it can be voted in before the summer recess and before current support initiatives run out.
  • Market consensus remains for GDP levels to recover their 2019 levels by 2021. The weaker employment picture will likely keep inflationary pressure at bay and will allow central banks to maintain very accommodative policies. Interest rates futures contracts are not pricing any significant pick up in bond yields before December 2022. Low interest rates and support from central banks are likely to continue to provide a positive backdrop for risky assets.
  • Both implied and realised volatility are normalising with the VIX back to end of February levels and equity markets continuing to recover. The combination of reduced European political uncertainty, lower level of volatility and ample levels of accommodation provide a supportive backdrop for risky assets.
  • The second quarter 2020 earnings season kicked off in the US last week and is starting this week in Europe. So far, only 12% of S&P 500 companies have announced their results, earnings have declined by around 20% and they have beaten analyst expectations. Investors have largely discounted very weak earnings for 2020 and markets have been focusing on the expectations of earnings recovery for 2021, despite little forward guidance from companies so far.
  • Finally, in foreign exchange markets, the USD continues to weaken, especially versus the EUR with the positive news on the recovery fund. On the basis that structural support for the US dollar has eroded as both growth and rates differentials have significantly narrowed USD weakness may have further to run.

 

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

On the same subject:

Investments in the aforementioned fund are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment. Source: BNP Paribas Asset Management.

UCITS OFFER NO GUARANTEED RETURNS AND PAST PERFORMANCES DO NOT GUARANTEE FUTURE ONES