Given all the negative news headlines covering the coronavirus outbreak; rising unemployment; US/China tensions; and the protests across America, you might expect that global equity markets would be weaker.
However, equity markets continue to rise as optimism about an economic recovery (thanks to the extraordinary levels of government and central bank stimulus) is outweighing any and all concerns out there. Last night on Wall Street, the Dow Jones closed up 267.63 points, or just over 1%, while the broader S&P 500 index ended the day up 0.82% – and in the UK this morning, the FTSE-100 is currently up around 75 points, or 1.2%.
As equity prices tend to reflect future profits discounted by interest rates, the recent rise in equity markets is entirely justified, given data on the coronavirus currently suggests the risk of a second wave of infections is low, which will allow lockdown restrictions to continue to be lifted and ensure we get the V-shaped economic recovery that we have been forecasting. Consequently, if we look past this year (which we all know will be dire for economic growth and company profitability), we will see higher company profitability, while interest rates are likely to remain near zero well into the future.
However, as we have previously said, we like to invest with your long-term interests in mind by focusing on risk management and capital preservation, as we believe that this is just as important as investment performance and returns – consequently although the path of least resistance for equity markets is clearly currently up, we aren’t oblivious to the current economic and political risks and as such we are maintaining a cautious stance by holding a slightly higher than normal level of cash (including liquidity funds).
We believe that this portfolio positioning is prudent given Brexit negotiations; US Presidential elections in November; and inequalities that appear to be boiling to the surface (the coronavirus has disproportionately impacted lower paid US jobs as these are less conducive to working from home and with curfews being implemented in many areas across the US just as the economy reopens from the coronavirus lockdowns, companies may not reemploy laid-off workers as quickly as we had previously hoped).
Investment Management Team