The week to Wednesday’s close saw global equity markets put in another strong performance with the UK top 100 companies index gaining 2.6%, the US S&P 500 Index gaining 2.9% and the Euronext 100 Index gaining 4.8%. Commodities also put in a strong performance, with Brent Crude Oil up 9.1%. On the down side ,we continued to see modest losses in UK Gilts as investors shunned yields at close to 40 year lows and the threat of further issuance.
The week also saw strong recovery in both value stocks and the laggards, helping to propel Germany’s manufacturing heavy DAX Index 7.1% higher. This reflected the ongoing mismatch between the high valuation of Growth stocks and more conservative valuation of Value stocks that we have highlighted before and also the move to price in a sharp V-shaped recovery.
Certainly, it is wrong not to be encouraged by the re-opening of businesses across the UK, Europe and all-important US and a key mistake to expect ‘Joe Six-Pack’ to do anything but return to his old ways and to start spending again. On the other hand, as salary support schemes are removed and we can see the underlying scale of unemployment it is hard to do anything but guess what profits from a swathe of businesses will look like, or indeed how much Government will choose to claim in future taxes to pay back today’s debts. A significant number of companies have removed guidance, leaving individual analysts to guesstimate what those numbers will look like.
Reviewing strategy research over the past week, three things are apparent:
- The first is that we should not confuse uncertainty with risk. For a long-term investor the risk that returns from equities fall below those of cash or fixed interest for an extended period is very low, though uncertainty over immediate short term returns remains high.
- The second is that the near forty year decline in government bond yields that has supported the long bull market in equities, property and other asset prices is at an end. If we are to have low inflation and low yields then we should expect lower investment returns.
- The third is that many, including ourselves, came into 2020 with a view that US equities were already discounting strong earnings growth in 2020 – without which we would be lucky to see a positive return. With considerable uncertainty over the speed and extent of the recovery in corporate earnings this year and with heightened global tension, the risk is that in the short-term what are increasingly momentum-driven equity markets overshoot. With the US S&P 500 now just 7.8% off its 12 month high, further upside may be hard to achieve in the short-term.