The economic data of the G10 nations are continuously improving and in recent weeks most of them have even clearly exceeded market expectations. This can be seen very clearly looking at the G10 Surprise Index, which measures the deviations from expectations and is now back to pre-Covid-19 levels. Leading indicators in the developed countries and China also continued to improve steadily in June. However, the speed of this recovery remains a downer. It will probably take us until the end of 2021 to reach pre-pandemic levels and it will be a bumpy road. The recovery is likely to be hampered several times in the coming months by resurgent or locally rising infection rates – every two steps forward will be followed by one step backward.
In the United States, the number of new Covid-19 infections is beginning to rise sharply again in some states. The United States has also flattened the curve, but in contrast to Germany or Switzerland no substantial decline in the number of cases can be observed. The US is thus actually still in the first wave and it seems that some states such as Texas or Florida have allowed their economies to reopen too quickly. The result is a massive increase in new infections, which in these states even exceed the peak values of May. Although we do not expect a lockdown as in the second quarter, the ongoing reopening of the US economy is likely to proceed more slowly than the US government desires.
The battle against the corona virus is not over yet. The numbers in the US and Latin America of the last two weeks were a reminder. In the short-term, the resurgence in the USA will create a headwind with regard to the recovery of the largest global economy. We believe that this effect is only temporary and that the growth environment will steadily brighten in the medium term. In Asia and also in Europe, the situation is currently somewhat better than in the US. Unemployment in the developed economies is high at the moment, but we think there will be an improvement in the coming months. In addition, the US consumer is in better shape than during the financial crisis and therefore has greater flexibility. Nevertheless, the call for government support is unmistakable. We believe that the fiscal authorities will inject further liquidity on both sides of the Atlantic in the second half of the year. Especially in the US, where the presidential election campaign is entering a hot phase, consumers will probably be offered one or two gifts from Washington.
Despite an S&P 500 price rally of over 30% since the lows in March, investor sentiment is subdued. This divergence is best illustrated by the AAII Net Bull Bear Index. We see further signs of subdued sentiment and positioning on the equity markets in the speculative futures position in the S&P 500 Index, which is at its lowest level since the end of 2016. However, there are some risk indicators that are back in neutral territory, and so it can be concluded that the market positioning is cautious, but no longer as negative as at the beginning of the second quarter.
Although the global economy is on the road to recovery at the beginning of the third quarter of 2020, the development of the corona pandemic is likely to create a sharper headwind on financial markets in the coming weeks. We maintain our neutral risk positioning, with a clear focus on selection in all asset classes. Particularly within equities, investors should not undertake experiments. Solid balance sheets and a good business model are the main criteria for selection. In phases of weakness, the portfolio can be supplemented very selectively with cyclical quality stocks. In the bond universe, interest-free government bonds offer little yield potential, with the exception of long-term US Treasuries, which can serve as a hedge. High-quality corporate bonds also remain in focus. Gold as a true diversifier naturally belongs in every private client portfolio.
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Author: Thomas Wille, Head Research & Strategy, Email: firstname.lastname@example.org
Editor: David Wolf, E-Mail: email@example.com
Source: LGT Bank (Switzerland) Ltd.
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