August was yet another month of comparatively good market returns in the face of fresh COVID-19-related anxiety. It was a good month for communications, tech, software and consumer discretionary stocks helping markets continue in their upward trajectory. And yet, The United States has seen another 1.45 million infections and 30 thousand deaths in August. In this same period, the rest of the world – with Latin America and Asia particularly affected – saw an estimated increase of 7.8 million infections and 176 thousand deaths. Despite this, markets remain relatively impervious, with the US, Japan, Hong Kong, China and South East Asian emerging markets stock indices leading the way. Of course, not all equities are doing well. Notably financial, energy and value-orientated stocks have suffered. Despite the fact that COVID-19 has changed all of our lives (and has taken many along the way) one might be tempted to think that markets can continue to grow despite the pandemic; some may even be tempted to believe that the global economy will learn (or, indeed, has already learned) how to operate with COVID-19 and that everything will be fine, economically speaking. While we remain optimistic, we are acutely aware of the direct and indirect damage a lack of vaccine in the medium term would inflict on markets and the global economy.
Global economic growth has remained strong in August; and economies have been getting back on their feet since April’s bottoming out thanks to government and central bank expenditures, a return to work and restocking. The JPMorgan Global Composite Purchasing Managers Index, which tracks the current direction of the manufacturing and service sectors, has increase from a low of 26.5 in April 2020 to 52.4 points in August which is where it was in January 2020 before the crisis occurred. The V shaped recovery has powered forward corporate revenues up from their June low and we will expect to see higher revenues in to 2021. In addition to current revenues, the consensus estimates of forward-looking revenues appear to have a bright future. Moreover, many people are moving out of major cities to suburbia. This trend has helped home sales and everything that goes along with moving from a relatively small apartment to a large house; i.e. cars, furniture, curtains; etc. Consequently, even General Motors has done well in the recovery.
And yet, it appears to us that markets are pricing in a medium-term end to the COVID-19 pandemic – as if a vaccine is a foregone conclusion and a second wave will be more of a gentle Mediterranean lap. We believe the failure to produce a successful vaccine would hit markets hard; moreover, it will keep the sectors who have not benefited from the rebound/V-shaped recovery in the precarious position in which they have been trapped since the first wave. Lockdown – in either its draconian or partial form – suffocates economies and the businesses that are their building blocks. Would governments and central banks have an appetite (or liquidity) to bail everyone and everything out again? We are not convinced that Congress will act in time; moreover, there simply is not an endless magic money tree.
Despite entertaining this worrying scenario, we have faith that we can survive without a medium-term vaccine solution and that we can avoid the second wave being on the same scale in terms of the death and economic destruction the first one inflicted. Global healthcare systems understand COVID-19 in a way it did not in early 2020; we also have bona fide treatments vis-à-vis Gilead’s Remdesivir and other ones that are anticipated to be forthcoming by the end of 2020 and/or beginning of 2021. Routine testing in vastly increased capacities is in the works around the world, which we believe will offer people the ability to live with a modicum of normality and enjoy the confidence of engaging with the outside world (and economy) as non-carriers of the virus.
In the meantime, we are hopeful that the “Magnificent 7” can continue to push the markets in the right direction and that a better grip on COVID-19 might see other sectors join in the rally. We are also excited by the prospect of the pharmaceutical sector erupting once somebody creates a successful vaccine that has the power to release people and the economy from the shackles of the pandemic. While these remain turbulent times with significant hurdles ahead, we remain long term investors seeking sustainable trends as our world’s economy continues to rapidly evolve.
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