A strong start to the month
June started really well for global equities. The first week ended with a surprisingly positive US employment report and the MSCI AC World index had gained 5.8% in US dollar terms. On 8 June, it reached its highest since 25 February, up by 42% from its March low.
After that, financial market movements became chaotic, alternating between bullish and bearish sessions and often reversing on the same day. Implied volatility surged back to its highest since early May before easing off again.
Despite this resurgence of investor edginess, global equities rose by 3.0% on the month, with emerging equities outperforming (+7.0% for the MSCI Emerging Market index in USD), making up some of the ground since January. Over the first half, EM equities lost 10.7% compared to 7% for the MSCI AC World, with Asian emerging markets outperforming both in June and over the year to date.
Uncertainty remains viral
Profit-taking after a rapid rise partly explains the recent moves, as does investor anxiety. While geopolitical flashpoints (North/South Korea; China/India; China/US) may have come off the boil, two other concerns remain: The COVID-19 pandemic and the severity of the recession.
The resurgence of coronavirus cases in Beijing, several US states and parts of Europe, as well as the catastrophic health situation in Latin America, have fuelled the assumption of a second wave of the pandemic. How the virus's reproduction rate evolves will remain an important short-term issue for financial markets.
Partial renewed lockdowns in China, Germany and Portugal and the halting of the exits in some southern US states are likely to raise a large question mark over the future of the economic recovery. The rebound of several indicators (consumption, industrial production, US employment) had underpinned equities’ recent performance.
In this regard, the OECD and the IMF revised their global growth forecasts downwards and pinned highly cautious comments to them. The IMF stressed the high degree of uncertainty in forecasts and the lasting consequences of the recession, particularly for jobs. Central banks echoed that mood: They noted that the recovery in activity had been faster than expected, but reaffirmed the need to maintain support for the economy.
The prospect of low interest rates for a long time and of further monetary and budgetary measures haven’t entirely reassured investors, who seem to be gradually waking up to the reality of the economic shock.
IT sector: Still smashing it
Within developed markets, the major main indices
outperformed in June. The EURO STOXX 50 rose by 6.0%, while the S&P 500
gained 1.8% and the Topix slipped fractionally (-0.3%). However, the drop in
European indices since the start of the year
(-13.6%) is still larger than in the US (-4.0%) and Japan (-9.4%).
Globally, technology stocks outperformed significantly in June. The Nasdaq composite reached an all-time high and ended the month above 10 000, up by 6.0% from the end of May and by 12.1% so far this year. Consumer cyclicals did well, in line with the positive surprises on household spending. Telecommunications, utilities, energy and financial stocks were less sought after.
Exhibit 1: Risky assets rose for the third month in a row
EU reaffirms solidarity (almost)
While the previous months were marked by concerns about EU solidarity in the face of the COVID-19 crisis, June brought positive surprises.
The TLTRO (targeted longer-term refinancing operation) on 18 June saw EUR 1 308 billion gross raised by European banks, which corresponded to a net liquidity injection of close to EUR 550 billion. This should not only accelerate the distribution of credit to the private sector, but also allow banks to buy government bonds, rather than at the short end of the curve, by using such financing at -1% (i.e. 50bp below the deposit rate if certain conditions for granting credit are met). These carry trades were particularly noticeable in the ‘peripheral’ eurozone markets.
The end of the month saw hope for a favourable and speedy resolution of the ruling of the German Constitutional Court of 5 May. The ECB reaffirmed that its asset purchase programmes are effective in achieving its monetary policy objective. It provided the Bundesbank with information to prove that these actions are “proportionate”. Finally, the German Finance Minister lent his support to the ECB.
On fiscal policy, the EU heads of state and government summit on 19 June ended, unsurprisingly, without agreement on the “Next Generation EU” stimulus plan proposed by the European Commission in May. Even so, the tone of the discussions appeared quite positive. While several leaders emphasised the need to reach agreement this summer, others highlighted the many issues that remain, particularly the conditions relating to lending and transfers. That said, the actual structure of the recovery fund does not appear to be in question. Another summit is scheduled for 17 and 18 July. At the end of June, Angela Merkel recalled that “it is in Germany's national interest that the European Union should not collapse”.
‘Peripheral’ markets outperformed in June. The Italian 10-year yield eased by 22bp to 1.26% (despite large bond issues), while the Spanish 10-year yield eased by 10bp.
Unprecedented crisis needs long-lasting support
Having recently defined the COVID-19 pandemic as “unprecedented”, the International Monetary Fund revised down its forecasts for the world economy. A 4.9% contraction is now expected and the forecast of a 5.4% rebound in 2021 is tinged by an abnormally high degree of uncertainty.
The strength of the recovery will depend on confidence. In the most favourable scenario, it will take at least two years to return to the level of output seen at the end of 2019.
In the short run, news on how the pandemic is evolving will likely guide markets, which could lead to further erratic trading. Even so, at the end of June, our market momentum indicators were not sending a strong bearish signal for equities.
If the authorities react reasonably quickly to the first signs of a resurgence of COVID-19, worries about a second wave could recede. Obviously, any announcement about real progress in finding a cure or vaccine would be a game-changer.
In the short term, inflation does not appear to be a risk. Meanwhile, monetary and fiscal policies look set to remain accommodative for a long time, which should help to underpin both the recovery in activity and risky assets over the medium term.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.