What should we expect for H2 2020?
Suzanne Hutchins, portfolio manager of the BNY Mellon Real Return strategy, outlines the team’s market expectations for the second half of the year and beyond.
The next six months will most likely bring new waves of volatility, as markets and economies continue to be closely influenced by the news flow around covid-19 for the foreseeable future, and state intervention will continue to play a vital role in supporting economies around the world.
However, the array of fiscal and monetary stimulus deployed by governments and central banks globally have undoubtedly helped to underpin risk assets. Investors have also started to look forward to some economic normalization as we begin to exit lockdown measures, with the data from a number of the Asian and Australasian countries providing grounds for confidence that this can be achieved without a corresponding increase in infection levels.
Safe assets will also continue to make headlines as all investors reach for assets such as the US dollar in times of economic stress. However, the outlook for currencies should be cautious as the world’s major currencies are currently each vying to be the weakest currency to boost their global competitiveness. For this reason our preference is to invest in gold, because it has the appeal of a real asset that cannot be manipulated or debased.
Inflated government Under times of stress, government intervention becomes fundamental to economies and if what we have seen in the first half of this year is anything to go by, it would be reasonable to expect further large-scale monetary and fiscal policies from governments around the world.
The simultaneous commitments from central banks to purchase government debt, alongside action from governments in directing fiscal spending to support household and corporate incomes, have been necessary given the circumstances. In our view, the danger is that this then creates inflationary pressure. Beyond the near-term impacts, if new monetary policies create a path to inflation, then we could face a very different outlook to that which we have experienced over the past three decades.
Despite most of the world having gone into lockdown and now re-emerging, the broad momentum of global politics has remained on track. For the world’s largest economy, this has meant US election campaigns are in full swing. And for the UK, Brexit negotiations are ongoing, despite being given little airtime. We should continue to consider US politics as US markets could be impacted by the shift in polls for the US election. Historically, US elections have exaggerated and extended price volatility, and we expect this election year to be no different. In the UK, Brexit may cause the economy to stutter further at a time when it is fragile.
Where to look in the second half of 2020 We expect Covid-19 will continue to impact markets as we head into the second half of the year. For this reason, in the near to long term, the focus should be on those sectors less susceptible to lockdown measures and the economic cycle. One group of companies that has had a remarkably ‘good crisis’ are the leading US technology companies—the ‘FAANGs’, which were worth twice as much as the entire FTSE 100 as at the end of May 2020.¹
These companies are typically cash rich—so face no balancesheet problems—and the nature of their business has helped them gain market share from more traditional business models. As such, they have not only weathered the storm relatively well, but also been in the vanguard of the subsequent rally.
It is likely we will continue to see increased resources deployed to pharmaceuticals to cure illnesses such as Covid-19, but the focus should be on quality companies spearheading innovation as this will be a key differentiator. In regards to the consumer sector, established brands may be better suited for investment consideration.
Whilst the share prices of the more cyclical areas of the economy such as airlines, hotels and restaurants have been more depressed because of the direct impact of the lockdown, there is likely to be some ‘catch up’ as the market rotates into these out of favor names as the economy recovers. We would tread carefully and consider only those that will be survivors of the post Covid crisis world, and only those that exhibit strong fundamentals and financial strength.
Beyond 2020 Following the year that put rainbows on windows across the UK, green is the color we hope to get behind in 2021. The economic and social lockdowns caused by covid-19 have led some to reflect on the need for a more sustainable future.
The massive stimulus packages announced by governments, including a likely significant increase in infrastructure spending will likely represent a tailwind for this area of the market, particularly green projects which are likely to lead to further growth in the green bond market as funding is provided.
The credit excesses across the world, most notably in China, give us cause for concern, particularly as the growth in leverage has been substantial and has extended into areas such as shadow banking which are by their nature opaque and less tightly regulated. This said, emerging markets will likely be great beneficiaries over the longer term, especially if the US Dollar continues its path of weakness. This should be supportive of liquidity conditions where the world’s wealth is growing fastest, where you have the massive populations and with a 10 year view, certainly a region where there may be rewards.