The week of 3 August saw equity markets finish up in US Dollar terms on the back of positive COVID-19 treatment news and decent economic data. Coronavirus deaths in the US remain elevated, above 1,000 a day¹, but appear to have slowed a little over the last week. While over in Europe, case numbers in Spain continue to rise, and France and Germany are also seeing case numbers creep up. However, there was some good news in terms of a potential treatment last week, when it was found that hospitalised COVID-19 patients who received transfusions of blood plasma rich with antibodies from recovered patients reduced their mortality rate by about 50%².
In terms of the economic data, the main highlight last week was the July payroll release, which showed that the US added 1.8 million jobs over the month³, pushing the unemployment rate to 10.2%. Meanwhile, the initial jobless claims came in at 1.2m², compared to 1.4m the previous week – the lowest level since before the start of the pandemic. The final July purchasing managers’ index (PMI) releases were also out last week and showed an expansion in the Eurozone, while the US reading stabilised but remained subdued by virus containment measures. Finally, retail sales across the Eurozone jumped back to pre-crisis levels in June, up 1.3% compared to the same time last year as consumers return to the shops¹.
It was hoped the US congress could agree a fresh stimulus package to help the economy bounce back; however, it seems the Democrats and Republicans reached an impasse, leading to Trump announcing four executive orders over the weekend. These orders are, however, unlikely to have an immediate or meaningful impact on the US economy, given that no support was given to struggling businesses.
Tensions rose between the US and China after Trump gave US companies 45 days to stop dealing with the Chinese owners of TikTok and WeChat⁴, which he described as a threat to national security. This came after he also recommended that Chinese firms listed on US stock exchanges should be delisted unless they provided US regulators with access to their audited accounts.
Tensions were also running high over the weekend after Hong Kong pro-democracy media tycoon, Jimmy Lai, was arrested under the new Chinese national security law⁴ and the US placed a number of sanctions on Chinese officials in Hong Kong.
In terms of central bank news, the Bank of England met last week and announced no changes to its current monetary stance. Governor Bailey also reassured investors that the bank will not tighten monetary policy any time soon and is ready to support the UK economy through its long road to recovery. Bailey also highlighted that negative rates are part of the bank’s toolbox, but there are no plans to use them at present.
And finally, in other news, gold topped $2,000 per ounce¹ for the first time last week as investors turned to that and silver for downside protection as real yields in the US dropped below minus 1%¹. Gold likes negative real yields and dislikes rising real yields, which is what we were seeing by the end of the week.
The performance data through to Thursday’s close showed most measures were in positive territory for the week. Friday was a relatively quiet day, with the only notable movements being that some of the strong investments of late, like tech stocks, sovereign bonds and gold gave up some of their gains.
Global equities were firm over the week, up +2.4% in US Dollar terms and +2.0% in Sterling. The difference being largely because the US Dollar was under pressure throughout the week on worries about the US’s failure to control the virus and lift its stalling economy. Asia ex Japan (+2.6%) and Japan (+3.1%) were the best performers – in fact, Asia is now the best performing region up +7.4% year-to-date in Sterling terms. Europe ex UK saw the smallest gain (+1.3%).
The cyclical sectors showed more life than defensives last week, with energy, industrials, consumer discretionary and materials all up around +3.0% or more. Meanwhile healthcare (+0.1%), consumer staples (-0.1%) and utilities (-0.9%) – all classic defensives – were off the pace. Technology still did well though, up +3.5%, although there was a bit of give-back on Friday. Some of this is a reaction to corporate results being better than expected and also continued improvement in economic activity, albeit off a low base.
In terms of style, it was still a story of growth (+2.4%) beating value (+1.5%), but interestingly small caps (+3.0%) beat large caps (+2.0%), which is not so surprising because small caps tend to be more cyclical.
All the portfolios saw gains in both Sterling and US Dollar, with little currency impact as the GBP/USD rate was quiet over the week. Relative to the Morningstar Peer Groups, all portfolios were broadly in line – a touch ahead at the lower risk end, a touch behind at the higher risk end.
Given our short duration strategy, it was helpful that government bond yields were relatively quiet before starting to rise as the week drew to a close. It was also good that credit spreads narrowed, which helped our corporate bond funds and contributed to a good week for the Global Income strategy.
Property securities were also reasonably firm. Last week we noted it would be a big week for BMO Commercial Property Trust (BCPT), and it was up +12% following its announcement of an immediate restoration of a dividend. The pay-out has been set at half the previous level, which is still very conservative, but perhaps rightly recognises that the global and UK economies are still facing plenty of challenges. BCPT also intimated that it was pleased with Q3 rental collection, which is well ahead of where it was at the same time in its last quarterly rent cycle. Also, there was good support for the Healthcare REITS, Impact and Target. Both are still 100% on rents, and generally their operator tenants have managed COVID-19 well. In fact, they are now seeing a big rise in applicants for places, after being relatively subdued during the lockdown period.
On the alternative investment front, our renewables are all looking solid and investors are appreciating their reliable dividends and the element of inflation protection they offer. We had a very good meeting with Greencoat UK Wind this week, which was encouraging. The wholesale electricity price has been rising lately, which is also positive. Prices were very subdued in Q2 due to the lockdown, but even so the dividend was well covered. The other trusts were in pretty good shape, with the exception of KKV Secured Loan Funds (as SQN is now known). That was starting to recover quite nicely, but during the week they announced they had found some more loans they intended to impair – these were relatively low for the C class, which we are invested in, but the market didn’t react well.
Overall, a positive week for portfolios, which remain positioned relatively conservatively due to both the dislocation between economies and markets, and the current heightened uncertainty.
In terms of economic data, one of the main highlights this week will be Q2 gross domestic product (GDP) releases from the UK and Eurozone. We will also see July consumer price index (CPI) releases from a number of major countries, labour market data from the UK and Eurozone, and retail sales numbers out from the US and China.
On the political front, the main news is that Joe Biden is expected to announce his choice for the vice presidency this week.
And finally, earnings season winds down this week with only 14 S&P 500 companies reporting.
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All data is for the four days ending 6 August. Sources: Nedbank Private Wealth and (1) Financial Times; (2) Wall Street Journal; (3) US Department of Labor and (4) Reuters.
Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
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