World Market Review July 2020

After five months of crashing and rebounding, global markets were calmer in July, with world indices gently rising a few percent. Meanwhile, Covid-19 spread out in the Americas and Africa, and infection rates surged again in the US. In Europe, reopening seems to have triggered a smaller second wave in many countries.

In Britain, much of the initial economic pain has been numbed by huge deficit spending. As well as the furlough scheme, government support came through industry bail outs, guaranteed loans, and targeted VAT cuts. The largesse cannot be maintained forever, and once the spending taps are wound down there will likely be a surge in unemployment. While UK stocks look cheap compared to international peers, investors should bear in mind the cyclical nature of much of the London market, and the risks of Brexit negotiations hurting prospects further.

With its large geography and absence of national lockdown, America seems to be experiencing a second wave without really getting over the first. Its stock market, however, has been the best performing among the major countries, because it is dominated by resilient sectors like technology and healthcare. The power of Big Tech was on show at the end of the month, as members of Congress grilled the CEOs of Apple, Google, Facebook, and Amazon.

President Trump changed his tune on face masks, perhaps with an eye on his nine-point lag against Democratic rival Joe Biden in the polls. Biden will announce his VP pick in early August, which could give us a flavour of what sort of changes a Democratic win in November would bring. Both candidates are relatively market-friendly, though a sweeping “blue wave” could mean higher corporate taxes and tougher regulation.

The US dollar had its worst monthly fall since September 2010, but we were well-positioned for it by hedging our US index fund into sterling, which added almost 5% performance to the fund.

Economists will argue about how reliable Chinese data is, but so far it looks like China has reopened successfully, with resilient consumer spending and business investment, and only a trickle of new virus cases. Other emerging markets are having less luck, and the collapse in oil prices is punishing petroleum exporters like Venezuela and Brazil. China itself is increasingly facing the ire of western governments on cyber security, notably on Huawei and TikTok.

When Covid-19 first emerged in Europe, the EU appeared frozen like a deer in the headlights. In late July, however, European leaders managed to agree a €1.8 trillion recovery package. The figures are large, but more important is the principal of a fiscal transfer from the rich north to the struggling Mediterranean economies. In the future, bearish investors will find it harder to target weaker Eurozone countries, because those weaker countries now have the weight of the bloc behind them.

We have slightly increased our weighting to Europe, concentrating on funds that hold the highest quality companies, such as Nestlé, L’Oréal, and Ferrari. Our Montanaro European fund had a particularly strong month, outperforming the European index by a good 5%.

Japan appears to be undergoing a second wave of the virus, though its first wave was so small that the country still has just a twentieth of the UK’s total cases per capita. The Japanese culture of respecting personal space and bowing could be the key differentiator here. On the currency markets, the Yen, which tends to act as a safe haven, has weakened against the pound since its surge during the initial panic, but remains around 5% higher than at the start of the year.

Stock markets are forward looking, and investors have looked through the dire short-term data to the recovery beyond. Thanks to this, and thanks to huge monetary stimulus, most markets have recouped much of their losses. We feel this is a good time to cash in some of the extra gains we have generated thanks to being overweight stocks, so in late July we dialled down our risk by shifting some allocation to more defensive assets.