Omnium Wealth Management

Investment Update - July 2020 Dynamic Portfolios

Whilst the economic decline caused by the Covid-19 pandemic is much deeper than after the 2008 global financial crisis, there are signs that growth has bottomed and is picking up.

Colin McInnes, Quartet Capital Partners

Overview

  • Equities are attractive relative to bonds, but by the most common measure of valuation (price/earnings ratio) they are not cheap. However, in the short-term markets are positively focussed on the emergence from lockdown and a potential cure for Covid-19.
     
  • Concerns remain over US equity market valuations as they seem to be relying on a V-shaped recovery to justify their valuations.
     
  • The main risks in US equities come from continued increases in Covid-19 cases and the imposition of a continued and more stringent lockdown, as well as the approaching US presidential election in November, which is too close to call.
     
  • The Democrat nominee, Joe Biden, plans to - at least partially - reverse Donald Trump’s 2017 corporate tax cuts and is looking to impose a digital tax that would, in particular, impact the roaring technology sector.
     
  • The other election risk is a re-escalation of the US/China trade war. A recovery in the US stock market and economy could provide President Trump with his best chance of re-election and we expect that he will not endanger this by re-starting China trade hostilities.
     
  • In the short term, Brexit uncertainty and the slow decline in virus cases may continue to hold the UK market back. However, on a relative basis the UK market offers better value compared to many developed markets.
     
  • In Emerging markets, China’s early exit from the lockdown and stimulus measures should benefit the region’s stock markets more broadly.
     
  • Bond credit spreads have narrowed and as of now they only adequately compensate for the likely rise in default rates that may follow a recession. As a result we are neutral regarding corporate debt.
     
  • Government bonds look expensive. Low inflation and dovish central banks should, however, limit the rise in bond yields (price falls) during the recovery from lockdown.
     
  • Sterling is likely to be volatile around ongoing Brexit negotiations.


Below is a market commentary from Colin McInnes, Managing Partner of Quartet Capital Partners, the discretionary managers of our Dynamic Portfolios…

In the short-term we have deflationary concerns but, given the huge stimulus from governments and central banks, inflation may surprise to the upside over the medium term. As a result, inflation linked bonds offer reasonable value.

There is a clear risk of a second wave of Covid-19 infections. This is a new virus, meaning it has no exact precedent. A second wave of infection is possible, if not inevitable, and its burden on health care systems and the potential for renewed closures is unknown. However, the upside is that countries should enter a second wave wiser and better prepared, with the availability of greater testing, contact tracing, protective gear and drug interventions.

Record levels of stimulus from governments and central banks, sustained low interest rates and continuing low inflation are creating a supportive environment for stock market performance over the coming months.

Whilst the economic decline caused by the Covid-19 pandemic is much deeper than after the 2008 global financial crisis, there are signs that growth has bottomed and is picking up.

 

Colin McInnes
Managing Partner
Quartet Capital Partners

 

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