Global equity markets continued to rise yesterday (27 May 2020) as economic reopenings, stimulus measures and optimism about efforts to find a treatment and vaccine for the coronavirus outweighed the simmering geopolitical tensions between the US and China.
The FTSE-100 closed up 76.49 points, or 1.26% – and is today, as we write, up a further 30 points, or 0.5%. On Wall Street, the Dow Jones and the S&P 500 rose to close above the psychological 25,000 and 3,000 levels respectively for the first time since early March: the Dow rose 553.16 points, or 2.21% to 25,548.27, while the broader S&P 500 rose 44.36 points, or 1.48% to 3,036.13.
The story of the day was the EU’s €750bn stimulus package (split €500bn in grants and €250bn in loans). Of course, all 27 EU members need to ratify the stimulus – and there are never any guarantees when it comes to European summits, especially as it appears to be a step on the road to a fiscal union, which has to date been the EU’s biggest flaw. However, the sticking points for those countries that had previously opposed the plan appear to have been resolved with the bigger allocation to grants, so we would expect the deal to be approved – and this will obviously boost sentiment across Europe and allow equity markets to continue to look past the current poor economic data and instead focus on the economic reopenings and recovery and in doing so, help to sustain the current equity market positivity.
Interestingly, economically sensitive stocks have been particularly strong this week as they have reversed some of the massive losses they suffered during the economic lockdowns.
Shares in the Travel & Leisure sector for example have been amongst this week’s biggest gainers. IAG (the owner of British Airways) is currently up around 35% this week, Carnival Cruises is up just over 25%, while the tour operator, TUI is up over 80%! Shares of retailers which have also been negatively impacted by the ‘stay at home’ order have also been big winners: JD Sports is up nearly 20% this week, while Associated British Foods (the owner of Primark) is up nearly 15%.
While the path of least resistance is clearly currently up, as lockdown restrictions are lifted, we don’t believe that some of these increases are fully warranted.
Although we have argued that there will be a V-shaped recovery and we will see consumer spending pick up, the current social distancing rules and lack of a vaccine will mean that restaurant bookings and spending on holidays will be slower to pick up meaning this week’s sharp rally in these companies could quickly reverse – and as such, we are currently underweight in these companies.
While this decision has slightly dulled our relative investment performance this week, as we have previously said, we believe that risk management is just as important as investment performance and returns, meaning that we will never shoot the lights out with our investment performance, but instead, provide you with consistency.
Elsewhere, there was little excitement from the Fed’s Beige Book – as their assessment of the US economy remained weak (especially in travel and hospitality). Of note however, was the concern on wages: as companies appear to be considering cutting employees’ salaries – which could impact the speed and shape of the US economic recovery given the consumer accounts for around two-thirds of the US economy. However, we haven’t seen much evidence of this actually happening – and in fact, the Beige Book also stated that consumer spending in one of the 12 Fed districts had increased and several districts saw improvements in car sales.
Additionally, we will see this afternoon in the weekly US jobless claims data if laid-off workers are being re-employed.
Investment Management Team