Market Update – 5th August 2020.

Good news is hard to find from watching TV or reading the tabloids – and no wonder given the list of negatives, for example:  the recent reacceleration in coronavirus infections; the continuing Republican/Democrat standoff in Washington over the amount of support that is needed for those companies and workers that have been negatively impacted by the coronavirus; the deteriorating US/China relations over trade, Taiwan, Hong Kong and now the TikTok app; and following yesterday’s explosion in Beirut, tensions in the Middle East could start to rise once again.

While it is completely understandable that this may not appear to be a great environment for equity markets, these concerns are already known and reflected in equity prices.

Additionally, there are plenty of reasons to be positive:

  • the economic picture is still one that is recovering strongly;
  • the current Q2 company reporting season has not been anywhere near as bad as feared at the start of the coronavirus outbreak and the associated lockdowns – and as a result, future expectations of company profits are being upgraded;
  • the spread of the coronavirus virus appears to be levelling off, with a number of US hotspots (such as California, Arizona and Florida) starting to fall.

Also, further US fiscal stimulus is likely to come through fairly soon as neither the Republicans or the Democrats will want to be seen as playing brinkmanship at the expense of hard-hit American workers ahead of the Presidential elections on 3 November 2020.

Furthermore, given the number of pharmaceutical and biotechnology companies around the world working on a coronavirus vaccine, the chances of a breakthrough is probably not too far away – and of course, a vaccine will allow economies to fully reopen and thus speed up the economic recovery.

Progress on additional US stimulus and/or a vaccine breakthrough will incentivise those large investors that are currently sat on the side-lines to invest their cash – which should provide a further boost for equity markets.

Economic data is thin today – so all eyes are on tomorrow’s BoE interest rate meeting and US weekly jobless claims data.

While BoE policymakers may not reduce UK interest rates tomorrow, we believe it is only a matter of time before UK interest rates follow those in Europe and go negative – which would be a positive for equity markets as it will help stimulate the UK economy (and therefore aid our economic recovery) and should help boost inflation which is currently running well below the BoE’s 2% target, at just 0.6%.

Investment Management