Weekly investment update

Wednesday 27 May saw the European Commission president, Ursula von der Leyen, present plans to help struggling EU members. Her plan endorsed the €500 billion recovery fund originally proposed by France and Germany, which will be handed out in the form of grants. She then set out her ambition to add another €250 billion of borrowing to fund loans to member states. The plan still has to be signed off by all 27 members, including the ‘Frugal Four’ of Austria, Denmark, the Netherlands and Sweden, who may cause delays.

The same day saw the European Central Bank (ECB) president, Christine Lagarde, warning the Eurozone economy will shrink by around 8% to 12% this year – a recession twice as deep as followed the 2008 global financial crisis, but which should come as no surprise to anyone.

The US weekly initial jobless claims came in at 2.1 million on Thursday 28 May, bringing the total number of initial claims in the last 10 weeks to over 40 million. However, a lot of attention was also rightly directed at the continuing claims number, which showed the number of Americans collecting unemployment benefits dropped for the first time since the start of the pandemic – potentially a turning point for US unemployment numbers.

The US’s relations with China remained in the headlines as Donald Trump announced on Friday 29 May that he would begin taking steps to revoke Hong Kong’s favoured trade status with the US, after China imposed a new national security law on Hong Kong. Markets did, however, react relatively calmly given that more drastic measures had been priced in the day before and as Trump did not immediately impose sanctions on China or propose changes to the ‘phase one’ trade deal.

Over the weekend, protests surfaced across the US, and spread around Europe, over the death of George Floyd, who died while being placed under arrest. Although the police officer who was filmed kneeling on his neck has been charged with murder, it seems likely that the protests will continue. As such, health officials have raised concerns over a surge in resultant COVID-19 cases given the numbers joining the mass gatherings.

The week of 25 May was a good week for riskier assets, including equities and property investments, with the latter rebounding on news that England is set to allow non-essential retail outlets to reopen on 15 June, which was seen by the market as good news.

The MSCI AC World Index rose +3.5% in US dollars, and +2.1% in sterling terms. Meanwhile, we saw a bit of a rotation in terms of market leadership, with equities that have lagged for the last few months clawing back a bit of ground against the leaders.

All developed markets outperformed the US for a change, with Europe ex UK up +5.0%, the UK up +3.5%, and Japan up +5.4%. Meanwhile the S&P500 moved above the 3,000 level for the first time in three months. Emerging markets, however, continued to struggle, with trade spats between the US and China a factor, as well as COVID-19 issues. Brazil is having a particularly tough time.

In terms of style, value (+3.7%) outperformed growth (+0.9%), and small capitalisation stocks (+2.9%) slightly outpaced those with a market capitalisation of US$10 billion or more (+1.9%).

At a sector level, cyclicals generally had a better time versus stable earners, with financials up +6.6% and industrials up +5.3%. Real estate rose +4.2%.

The increase in investors’ appetite for risk also extended to the bond markets. Generally speaking, both last week and over the month, government bond yields nudged higher, while credit spreads narrowed, indicating an improvement in corporate creditworthiness.

Even so, government bond yields remain very low, with central banks controlling them through quantitative easing – a situation we believe is unlikely to change for the foreseeable future.

It’s perhaps worth highlighting that the Bank of England issued its first ever negatively yielding bond at -0.03% ‒ a landmark moment.