Markets settled lower yesterday as we await the finalisation of a fiscal stimulus package in the US, in addition to Q2 reporting season continuing to be in full flow (a set of quarterly results that are pricing in the fallout of the height of the pandemic).
Despite markets being driven lower over concerns of a second wave of the coronavirus and indeed Q2 reporting season continuing to announce weak results amongst many sectors (albeit an expected weakness), long term positives were apparent in multiple economic data sets that were released. We saw European economic confidence for the month of July (coming in at 82.3), beating not only May’s data, but also expectations. Even though consumer confidence for the block remained unchanged, industrial and service confidence began to pick up which will ultimately drive spending, employment and wage growth. In addition, we also saw Japanese retail sales, whilst still contracting slightly at -1.2% year on year, massively exceed expectation by in excess of 4.5%. It was this, coupled with the US Federal Reserve’s accommodative stance that saw Japanese markets open yesterday’s session strongly.
So, even though yesterday’s inflation data in countries such as Spain and Germany marginally disappointed (largely due to the resurgence of the coronavirus in those regions), today’s broader inflation measure (CPI) for Europe as a whole came in strong, beating expectations at 1.2% year on year. This, when coupled with the confidence data, suggests that businesses and consumers are still willing to spend, which in turn will aid in supporting an inflationary environment in the months to come.
Today, European markets opened much stronger, with the US futures also pricing strongly ahead of the US market open, largely shrugging off yesterday’s historically low US GDP growth data (-32.9% quarter on quarter) and increase in US jobless claims (driven by the resurgence in cases of the virus in the US). Today’s European GDP that also showed a contraction (-12.1% quarter on quarter) was largely priced into markets and did little to hinder them. This strength at the open was driven by a surge of positive quarterly results from technology giants Apple, Alphabet, Amazon and Facebook, as the pandemic increased the demand for their products and services. Apple reported Q2 revenues of $59.7billion, over $7billion ahead of expectation. Whilst it is clear why demand/utilisation of services offered by Alphabet (Google) and Facebook picked up strongly during the lockdown period (as these are methods of connecting with the outside world from your home), Apple’s and Amazon’s results are a further indication that the consumer is willing to spend. As, following lockdown measures, consumers not only turned to Amazon for shopping (with the high street closed), but also rushed out to purchase iPhones, iPads and Macs in order to stay connected during that period.
It is important for investors to remember that whilst the resurgence in cases of the coronavirus is indeed concerning, from an investment standpoint it is a short term transitory issue that presents compressed market valuation opportunities that are now also backed by a number of slowly improving economic data sets. So, even though US and European GDP was weak for Q2, it was expected due to the transitory nature of the coronavirus impact and will likely be a conclusion to this type of record low growth. We are not negligent to the fact that the consumer data is fragile and awaiting further fiscal support globally, but there is a strong will by governments and central banks to provide it! As we have said on multiple occasions, while we believe that the road to recovery will be rocky, it will be a recovery none the less, and looking through the short term noise, and sticking to a rigid investment process will be crucial for investors. It was Dr Daniel Crosby (a famous psychologist, behavioural finance expert and author) that said “the irony of obsessive loss aversion is that our worst fears become realised in our attempts to manage them”.
Jonathan Wiseman, Fund Manager