Up-and-Down-and-Up-and-Down: Q2 2020 Fairlight Global Markets Snapshot

Short and sharp, Fairlight’s Global Markets Snapshot summarizes the economic backdrop to Q’2 2020’s volatile results asset class by asset class.

Up one day, down the next. Since late February, it’s been difficult to track markets reacting to the relentless effects of the coronavirus pandemic. While we’ve seen a rebound recently as economies slowly open, more declines may be ahead of us. A portfolio globally diversified across a wide array of asset classes helps brace against this uncertainty.

Equities

United States

The U.S. budget deficit hit $3 trillion or 14% of GDP in the rolling 12 months through June. These numbers put the U.S. on pace for the largest annual deficit as a share of the economy since World War II. In May and June the economy added 7.5 million jobs. There are still 14.7 million fewer jobs than before the pandemic. One third of the S&P component companies have withdrawn earnings guidance, challenging analysts to provide estimates.

Europe

Reporting the largest number of cases of coronavirus in Europe, Britain suffered a $1.15 trillion loss in output from March to April. The UK economy expanded 1.8% in May after lifting pandemic-related commercial restrictions. The European Commission projects the German economy, heavily reliant on exports, to shrink 6.3% this year. The Bank of France expects the country’s economy to shrink by around 10% this year and the unemployment rate to reach more than 11.5% by the middle of next year.

China

Chinese imports of U.S. goods to jump by 11.3% in June from a year earlier, despite political tensions. China’s June imports from the rest of the world climbed 2.7% from a year earlier after a 16.7% slump in May.

Fixed Income

United States

Rising coronavirus cases drive demand for ultra-safe government bonds, thereby decreasing Treasury yields (as demand goes up, prices go up and yields go down). Ultralow, long-term yields indicate investors expect short-term interest rates to remain near zero for a prolonged period. Yields had climbed briefly in early June when there was more optimism due to the reopening of the economy. When the Fed indicated in April it would buy speculative debt of more cash-strapped companies, it sparked a rally in high yield bonds.

Europe

The European Central Bank’s (ECB) recent bond buying program is an effective backstop to riskier EU debt. This has resulted in the spread, or in other words the difference, between yields on government bonds issued by Italy and those by Germany is nearly as tight as it was pre-pandemic. The ECB has not yet included speculative debt in its bond buying program.

Emerging Markets

Data from the credit agency Moody’s shows that countries where the coronavirus has largely abated have fared better than those where virus cases still surge such as India, Brazil and Mexico. International Monetary Fund’s (IMF) emergency financing and specific central banks are providing support for some harder hit emerging market economies.

Real Estate

The real estate sector is currently trading at a significant discount, with some real estate investment trusts trading at 50 cents on the dollar. Real estate performance has depended on how sensitive the subsector is to coronavirus’s impacts. For example, malls, hotels and senior housing has typically underperformed the broader sector while industrial and storage have outperformed.

Oil

OPEC and its partners have collectively pledged to withholding almost 10 million barrels per day after launching a price war in March. This has stabilized oil prices to some extent, but as coronavirus infections continue to grow, there are still concerns that consumption could take years to return to pre-pandemic levels.

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