Pandemics, Protests, and Politics
Global financial markets staged an extremely strong recovery after the intial market reaction to the spread of the Covid-19 pandemic. From the bottom of the market on March 23rd, (Figure 1, Pane 2), major equity indicies globally recovered over 30%. On a year to date basis however, major equity indicies remain negative for 2020.
We are now in the process of the major developed economies of the world reopening. This is being done with an eye towards maintaing social distancing policies. The US labour market has begun to add jobs over the last few weeks, potentially indiciating to the market that the delgue of bad economic data may have peaked. Earnings reports for Q2, beginning next week, will be bad, but the markets appear to have discounted this and are anchored onto what the recovery will look like to the end of this year and into 2021 and 2022. As such, it will be very informative to hear from executives of these large public companies as to how their business outlooks are being shaped moving forward.
While we wait for a vaccine, it will be important to monitor how the impact of reopening economies affects the trend of new cases. There is potential for increased volatility should we begin to see a rapid increases in new cases and how that would affect the economic engines of these countries as well as the consumption behaviors of their populations. We are beginning to see some of this in the southern US, where active cases are on the rise. How governments around the globe, both on a federal as well as more local levels react to potential increase in cases will be important to monitor with respect to how bumpy the path of economic recovery will be.
Recently, the incessant focus on the virus and its spread has given way to societal unrest emmenating from the United States, but spilling over into other parts of the world. So far, financial markets have not given these events much thought, but the situation certainly warrants careful watching and evaulating. This is doubly so as focus will inevitiably shift to the upcoming US elections in November. While this has been far from a normal election year, we do expect the mainstream media to begin to focus more closely on the upcoming battle between President Trump and Democratic nominee Joe Biden. The recent tensions are certain to make an appearance as a talking point for both candidates.
While some of the rhetoric around how the markets would react to either candidate in the White House is overstated, without question there are legitimate policy aims on both sides that will have the ability to influence the US economy and impact financial markets globally. Spending promises, tax rate policy, and regulation are amongst those areas that would need to be assessed in light of who wins with regards to portfolio positioning, both on a macro level as well at a sector by sector level.
In line with the election cycle ramping up, we expect President Trump to increase his rhetoric towards China. After appearing to have a cooling of tensions throughout the later stages of 2019, the Covid pandemic and resulting fallout has seen what would appear to be a re-escalation of tensions between the world’s two largest economies. President Trump is all too happy to heap blame onto China for the deaths and econoimic fallout to US citizens from the pandemic. Re-escalation of tensions between the two countries provides another catayst for volatility in financial markets.
Equity Markets in 2020: Looks alot like a “V” from here
Taking a step back, we are of the opinion that conditions are in place for volatility to remain elevated in global financial markets. This is due to the possibilities for lumpy and uneven re-openings and recoveries in economies around the world, to a US Presidential election on the horizon, and increasing tensions between the US & China. As such the rapid recovery in global asset prices has given us pause and we maintain a more defensive position within both the equities and fixed income sleeves of the portfolio.
One of the major takeaways to come out of this period of time is that many of the longer term trends that we were already excited about and allocating capital to have been accelerated during this pandemic. The importance and adapability of technology and healthcare, the market share of ecommerce of overall commerce, the increasing usage of mobile payments, and the need and applications for cybersecurity are a few of these trends and sectors that have experienced this acceleration. These trends have seen adoption rates and demand increase during these times, and are all areas we continue to feel very strongly about moving into the future. We believe that being extremely selective with where we look to allocate capital will be very important moving forward. There are many areas of the economy that continue to face material issues and headwinds moving forward, and some of the move in these asset prices is unwarranted in light of this fact.
We continue to monitor news and data flow daily, with respect to how it affects investments within your portoflio. We continue to prioritze balance sheet strength, earnings quality, and cash flow sustainability during these times, as ultimately at some point some of the measures that the central banks have instituted during the crisis are going to be rolled back, and companies and industries will need to stand on their own merits. We want to ensure that the companies we are invested in, whether their equity or their debt, are able to do so.
McCulloch & Partners Investment Counsel
All data and/or charts are sourced to Thompson Reuters Eikon unless otherwise noted.
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