In last month’s market commentary we said that we expected a global economic rebound in the second half of 2020, which would continue into and through 2021; that COVID-19 infections and deaths would diminish substantially and that its presence would be all but extinguished in Asia; and that global manufacturing would start to pick up again (particularly in Asia).
At this point, we’ve seen indications that the global economy is beginning to rebound nicely. Massive global government stimulus, including free cash to citizens, fiscal spending, the Fed and other central banks around the world buying corporate bonds and quantitative easing are all having a positive impact on the global economy. Interest rates remain at historical lows and remind investors of former United Kingdom Prime Minister Margaret Thatcher’s famous 1980s quote: ’there are no alternatives’. Consequently, investors are continuing to favor equities in developed markets over low interest bonds with increased trading volume pushing stocks higher.
At this point we see certain parts of the world slowing the spread of the virus and getting back to work. By the end of May, the COVID-19 infection and death rates in Europe’s Schengen Area was becoming substantially lower than the worrying and desperate heights experienced in April. As a result, much of the area’s economic activity and manufacturing are resuming. Conversely, other parts of the globe are seeing new surges of infection, such as in Brazil, where new cases are at worrying levels.
In North America and the United Kingdom (UK) the virus seems to be just about where it was last month in Europe and Asia: at a point that is far from ideal but which some believe is showing signs of abating. However, we believe that North America and the UK may be opening up again a bit too early which may make the dreaded second wave a distinct possibility. Such an outcome would be catastrophic for the global economy that relies on their output. However, to be more optimistic, we believe that institutional investors are looking well past the economic destruction brought on by COVID-19 and to a return to economic prosperity in the not-too-distant future.
We believe that investors anticipating economic recovery has largely driven the US stock market up over 40% from its COVID-19 bottom and that it is helping to power the ‘round trip journey’ made by the S&P 500; i.e. returning to pre-pandemic levels as it did on June 8, 2020. Of course, it is not just market optimism helping international equities flourish. Along with the massive support by provided by the world’s central banks, COVID-19 infection rates are going down nearly everywhere excluding South America and a very positive US jobs report has served to bolster investor optimism. We are encouraged that the June stock market surge has been largely driven by industrial and energy stocks, which shows that markets are reacting to increased demand as reflected by the increase in international movement of goods and increasing global manufacturing.
Looking into the future, we continue to have a positive outlook for companies that are able to deliver goods and services to consumers and businesses internationally. We see increased potential in the pharmaceutical and biotech industries as efforts to combat the pandemic continues to increase. Businesses related to 5G and the use of 5G services and technology companies focused on communications services including cloud data storage are also likely to find favor with our portfolio managers. Additionally, if the recovery stays on track more investment opportunities will likely emerge in the energy, industrials and financial sectors. We believe that in many ways markets have shaken off the trauma of COVID-19 and as the effects of the pandemic recede the global economy will continue to regain its footing.
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