Markets remain cautiously confident

Logic & Architas finance Podcast, 13 July

The Nasdaq index hit a new record, led by the tech giants, while e-commerce stocks boosted the Chinese market to its best performance in five years. The latest financial round-up with a link to a Podcast by one of our partner’s, Architas…

In brief

  • The US market was favourable last week, despite a significant spike in Covid-19 cases in several southern states. Boosted by companies connected to online activity, such as Amazon, Netflix and Facebook.
  • Last week government bond indices were positive. The poor macroeconomic environment is supportive of government bonds because central banks will continue to purchase bonds, keeping borrowing costs lower to encourage economic growth.
  • This week we have some big US financial companies reporting Q2 earnings. The consensus estimate for Q2 is a fall of around 45%, marking a significant deterioration in expectations.

Our view

What’s been happening with US markets?

The US market was favourable last week, despite a significant spike in Covid-19 cases in several southern states. If you look closely, the strength is due to companies that are expected to benefit from the lockdown. In particular, sectors connected to the consumer. Think of Amazon, Netflix and Facebook. Industries expected to do poorly as a result of lockdown measures, such as energy and industrials, were negative on the week.

What about in China?

It has been a similar story in China, with the consumer discretionary sector (non-essential spending) performing well, particularly e-commerce, which has benefited from this shift to online spending.

Alibaba, the Chinese e-commerce name, which is the largest company in the MSCI Emerging Markets Index, was a particular beneficiary last week. It became the sixth-largest company in the world (in terms of market capitalisation), overtaking Facebook in the process. And it’s now up 25% since the end of June.

We’ve seen the Chinese equity market rally significantly over recent weeks, outperforming other major markets in Asia and globally too. The domestic onshore index was up 7.5% on the week, its best week in over five years. Interestingly, this is partly being driven by the state media, which is encouraging the public to buy equities.

What has been happening with government bond
markets?

Last week government bond indices were positive. The poor macroeconomic environment is supportive of government bonds because central banks will continue to purchase bonds, keeping borrowing costs lower to encourage economic growth.

And the investment grade corporate bond market?

The rally in corporate bonds continues. Since the end of March, we’ve seen a pronounced rally in developed market investment grade corporate bonds. The main central banks, the Federal Reserve and European Central Bank, continue aggressive purchasing programmes, which have benefitted US and European corporate bonds.

This has been broadly positive across all sectors, but energy related bonds in the US and eurozone have performed well, due to the continued level of support from central bank purchasing and the rise in oil prices.

Any news about US corporate earnings expectations?

This week we have some big financial companies reporting Q2 corporate earnings: JP Morgan, Citi and Wells Fargo, alongside healthcare companies such as Johnson & Johnson. The market will also focus on Netflix because it’s been a market darling during this crisis, as people subscribe to online media.

Overall Q2 earnings are expected to be poor. The consensus estimate is for earnings to be down around 45% (back in March earnings for Q2 were expected to drop about 14%), marking a significant deterioration in expectations. It is likely that Q2 will be the worst quarter this year and you should see improvements from here.

What next for investors?

  • Markets will look for signs of increasing coronavirus infection rates are in the US, which could upset stock markets. Elsewhere, gold and government bonds should continue to act as relative safe-haven assets.
  • Markets will be turning their attention to US earnings over the next few weeks.
  • In the meantime, patience and a long term view might be needed while waiting for a revival of economic activity and asset prices.

Listen to the latest podcast HERE

Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire and the surrounding area, but not limited to the region.