14 May - update from our investment partners
- 14th May 2020
What has happened
Markets took a leg lower driven by the two core risks in markets: US/China tensions and a second viral wave.
The latest on US/China
Trump rather antagonistically referred to COVID-19 as the ‘Plague from China’ whilst China, that has been quite quiet during this escalation of tensions, broke cover in the China Global Times saying it was “extremely dissatisfied” with threats of US sanctions over the pandemic and threatened retaliation. Before this comment in state-aligned media, China had been largely happy to communicate via official channels with the US Trade Representative and not ramp up the war of words, this change may encourage further comments from the White House which is unlikely to help risk appetite.
The latest on the ‘second wave’ risk
New case growth in Seoul has also picked up putting doubt over the efficacy of global lockdown easing. South Korea has previously been celebrated as a beacon of hope for the global pandemic given its intensive lockdown allowing it to keep the total deaths to fewer than 300. After these restrictions were released earlier this month authorities have struggled with several infection clusters that have developed. Chinese officials have also announced that they will test all 11 million inhabitants of Wuhan after a pick up in new cases a few days ago. Any pick up in Asia will have a read across to Western economies particularly given South Korea’s approach had been previously lauded as the global response template.
What does Brooks Macdonald think
Despite the rally the level of equity earnings yields compared to that available from government bonds continues to support our strategic preference for equities. That said, the aforementioned two risks look unlikely to go away in the near term and this may mean markets struggle to continue with the strong rally established in April. Given our addition to equity in March at an asset allocation level, as well as the rebalancing into equities that has taken at a portfolio level, we reduced our equity risk by 2% at our asset allocation meeting yesterday as an acknowledgement of the size of the rally as well as the ongoing risks. Given we have specific concerns around the European fiscal response to the pandemic crisis we have focused our cuts within European equities.
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.