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Our Director and Independent Financial Advisor Del-Ryan Rafter comments on the current climate.

Market Commentary

June 2020

Balancing Act

The confidence that investors discovered during April’s equity market recovery continued through May despite a stream of negative company news, a rising Covid-19 death toll & future evidence that the global economy will suffer the deepest recession in living memory.

Financial markets are of the opinion that the worst of the virus-related disruption is already behind us in terms of economic activity and there is some truth in this, as countries around the world relax lockdown restrictions. Sentiment has also been bolstered by the unprecedented scale of policy support offered by central banks, as well as levels of fiscal loosening that you might usually associate with wartime.

The markets rally has consequently begun to broaden out to embrace more economically sensitive companies, as opposed to the initial period which featured mainly “all weather” defensive stocks & those benefitting directly from dislocation.

If anyone had followed the old adage “Sell in May”, they might now be feeling regretful. Global Equities, having gained 10.6% in April, added another 4.2% in May and now stand 32.6% above the low point reached on the 23rd March. (As measured by the MSCI All Countries World Index) Investors are balancing a pile of different influences in order to reach their current conclusions. Company performance & the valuation placed on that, Monetary & Fiscal policy, which is currently stretched to previously unknow levels, investor positioning, liquidity and of course the biggest “known unknown” Covid-19.

As investors become more confident that they have identified the trough of economic activity, which now appears to have passed in April during the period of maximum lockdown, they are looking more to the recovery phase.

The FTSE100 Top 10 for May includes ‘EasyJet’ as well as three major mining companies, ‘Rio Tinto’, ‘BHP’ and ‘Anglo American’, although ‘Ocado’ still tops the list currently trading 60% above pre-virus peaks, for fairly obvious reasons. This is the sort of rotation typically associated with the recovery from recessions and may well have more legs over the summer.

Even so, you still need to be selective in your choice of stocks and should focus on companies with more resilient & durable growth characteristics. As many companies have chosen to cut or stop their dividend pay-out, either by choice, out of necessity, or by decree in the case of banks.

Now is not the time to be too aggressive in terms of risk as there are still many potential banana skins ahead.