June 2020 Review
The rebound in risk assets which started in the final week of March continued in June, albeit at a slower pace and not without encountering the occasional air pocket of turbulence/volatility. Indeed, volatility remains elevated as can be seen in the chart below courtesy of The Wall Street Journal and sourced from Goldman Sachs.
Global equities rose by over 2% during June. Bouts of volatility saw occasional but significant daily down moves before the upward trajectory in equities resumed. Equities witnessed a seesaw between better than expected economic data in developed economies led by the US and started by May’s unemployment data, and the worrying increases in Covid-19 infections in some large southern and western US states. Also, during the month, Fed Chairman Jay Powell’s frank assessment of the long road ahead for the US economy temporarily took the wind out of equity markets’ sails. Latin America became the epicentre of the virus.
There was much debate about valuations and the growing influence of the big US ‘tech’ stocks previously the recipients of large passive and indiscriminate buying. They probably deserve to be treated differently from each other with Microsoft and Amazon likely to have more durable business models than the advertising dependent Google (Alphabet) and Facebook. Cloud computing and cybersecurity remain in strong demand as themes and have excellent growth prospects. There was also ebbing and flowing by investors between ‘growth’ and ‘value’ stocks however you want to categorise those frequently inappropriate labels. In truth, there are many businesses with a value tag that will struggle to survive. Many well-known, retail-oriented business filed for bankruptcy in June.
Central banks and governments continued their support with the Bank of England and European Central Bank adding to their quantitative easing programmes. Importantly, there was a change of emphasis in Europe with Germany and France in particular, relaxing their longstanding fiscal shackles aiding European equities. Chinese stocks also did well despite political issues surrounding its governance of Hong Kong.
In debt markets, government bond yields were largely unchanged over the month, investment grade and high yield spreads narrowed further although any expectation that central bank buying will support the whole of the high yield market is offset by rising default expectations and a swelling of credits in CCCs, the most challenged credit rating. Gold and other metals continued their good performance, the former finding favour as an alternative currency although currencies were relatively stable in June.
June and its bouts of volatility reminded investors that the road ahead has a few speedbumps. Caution is required as lockdowns continue to unwind, although not in a number of US states who together represent a decent chunk of the US population and where the rise in Covid-19 infections is concerning. Political influences will have their impacts as the US election campaigning gathers momentum, China moves to a stricter governance over Hong Kong and the Brexit negotiations between the UK and Europe offset improving economic data.