There are a few things investors that can’t ignore in the next six months as investors weigh the risks still present in markets, says Willis Owen’s Adrian Lowcock.
Even if the second half of the year proves to be uneventful, the events that took place during the first half has made it an unprecedented year for the markets and economies.
After just over three months of global lockdown, the outcome of a vaccine remains uncertain and what economies will look like as they emerge from lockdowns remains to be seen.
Investors also witnessed some of the most volatile markets ever recorded which saw a severe sell-off in March followed by a dramatic rally year-to-date.
There has also been an unprecedented stimulus from central banks and governments worldwide as they try to combat the economic fallout caused by the coronavirus.
As countries start to come out of lockdown, and people slowly venture out into shops, pubs, restaurants, the economy starts to look like it is restarting, however Lowcock (pictured) warned that “this does not mean that markets are out of the woods yet, and investors should remain cautious”.
“When thinking about investing you should always keep an eye on the long-term horizon,” he said. “2020 has proved that you should also keep one eye on the short term, and there are plenty of danger signs facing equity markets.”
As such, Lowcock has identified five trends investors should look out for in the second half of 2020.
Weak US dollar
The first trend Lowcock said investors should be aware of is the weakening of the US dollar, after having been in a period of strengthening for most of the past decade.
Performance of major currencies against the US Dollar over 10yrs
Source: FE Analytics
That trend has started to reverse a little since March with the extraordinary measures brought in to shore up the US economy in the pandemic and maintain liquidity in markets.
Lowcock said: “A combination of stimulus from the Federal Reserve creating more US dollars, low savings, and high levels of government debt could mean a weaker US dollar is here to stay.
“That would be good news for emerging markets where companies borrow in US dollars, as a weaker currency makes their borrowing costs cheaper.”
US/China trade war
The second factor to watch out for in the second half is the evolution of the US/China trade war.
Tensions were high for much of 2019 until a Phase 1 deal was struck in January of this year between the two nations. The deal saw the US cut some tariffs on Chinese imports in exchange for pledges to purchase more American farm, energy and manufactured goods and settle some US complaints about intellectual property practices.
However, the outbreak of the coronavirus and re-emerging disagreements over intellectual property theft has led to tensions between the two countries rising.
Lowcock said: “Markets so far have shrugged off the trade tensions as they focus on the more immediate issue of Covid-19 and the impact that it is going to have on the world.
“As the recovery from the pandemic continues, the focus for investors may shift to the other headwinds the global economy faces.”
Disappointment in progress over vaccine
The third factor Lowcock suggested that investors should be wary of is the market pricing in too much optimism on finding a vaccine for Covid-19.
Any progress in finding a vaccine or treatment for the novel coronavirus has been met with a rally in markets and usually a bump in the share price of the pharmaceutical company linked to the drug.
However, Lowcock warned that “hopes of an early breakthrough are high, but finding a vaccine is a herculean task and even good news might not meet investors’ hopes”.
He added: “Stock markets are often optimistic and prone for disappointment and that remains a key risk.”
Extreme valuations
The fourth trend to watch going into the second half of 2020 is the extreme valuations of equity markets that have rallied dramatically since the March lows.
The rally has been fairly narrow, led by technology stocks and so-called beneficiaries of the lockdown, as investors see them gaining market share from old economy competitors.
“It is impossible to know when the momentum driving the valuations of some technology companies will stop, but as the share prices rise further the risks of significant losses increase,” Lowcock said. “Fear of missing out has gripped investors this year.”
Economic recovery
The final thing investors should be watching, according to Lowcock, is the economic data that comes out which can give an indication of the path out of the downturn.
“Economies should be functioning more efficiently than during lockdown, so the data will be more accurate and give a better reflection of economic activity and employment,” he said.
“Given the strong rebound in employment data in the US, investors have been more hopeful of a V-shaped recovery thus far. However, if pent up demand tapers and unemployment remains high, investor euphoria might be replaced as a U- or W-shaped recovery suddenly looks more likely.”