Weekly market recap: small fry

Global equities almost reach the same levels they started at this year, though the UK continues to straggle behind.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 10th July 2020

Having spent three months at her boyfriend’s home during lockdown, a woman was left “terrified” when she returned to her flat only to find potatoes had taken over. When she returned, she found a bag of potatoes had grown alien-like metre-long pink tentacles which reached out to every corner of her flat.

With global equities almost back to the same levels they started the year, the opportunity within UK equities continues to be small fry by comparison. Asset class returns in sterling and local currency are below; while EM equities were the relative winners last week, US equities continue to gain ground and are now just a whisker away from where they started the year.

Figure 1: GBP total returns

Source: Bloomberg

Figure 2: Local CCY total returns

Source: Bloomberg

While Europe appears to have largely contained the spread of Covid-19 with a few localised outbreaks, the US is currently experiencing an uptick in new cases with the highest daily increases happening in Florida, Texas and California. Meanwhile, the New York metropolitan area which was the epicentre of infections first time round has continued to see falls in daily cases. While the new spike in the US is a significant cause for concern amongst some commentators, it’s interesting to note that the US equity market appears broadly unphased by the new developments with the S&P 500 ending the week in positive territory.

Figure 3: While the New York metropolitan area has seen the greatest concentration of cases across the US… Figure 4: … Florida, Texas and California are currently experiencing the greatest growth rates

* Tri-state area combines New York, New Jersey and Connecticut to encapsulate the New York Metropolitan area
Source: John Hopkins, EQ Investors Source: John Hopkins, EQ Investors

 

Over previous weeks, we’ve touched on how there appears to be a growing disconnect between equity markets and economic fundamentals with the above being just the latest in a deteriorating economic picture. Further, we think it is likely this trend will continue in the near term, particularly as we approach a new earnings season! While US corporates conveyed expectations of economic damage both at home and internationally during the Q1 season, European corporates which tend to report on a semi-annual basis are due to release comments and numbers for the first half of 2020.

Analysts are currently forecasting a grim picture for European equities with aggregated expectations suggesting a near 40% decline in earnings versus a 30% decline in the US. We believe contributing factors to this include Europe’s lack of large technology names that have driven earnings growth in the US, and that Europe’s index has historically been dominated by both commodity-related industries and financials which have both suffered in recent months.

Figure 5: The pan-European STOXX 600 (SXXP) has consistently disappointed investors in recent years vs initial expectations for the year while the S&P 500 (SPX) has outperformed 

Source: Bloomberg

 

One keen observation we made during the Q1 earnings season in the US was just how many companies were talking about upping IT spend and the implications of working from home. With technology a theme we continue to like as a house, we’ll be keen to hear whether European companies are discussing similar (or indeed other) trends.

STAT OF THE WEEK: 0.3% – the UK’s average annual productivity growth since the 2008 crash (Royal Statistical Society).

DATA CORRECT AS AT: 10/07/20

Contact

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About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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