It reads like a total contradiction: A more and more spreading pandemic with further drastic economic downturns, while the equity indices are targeting old or even new highs.
Not really, when you look at the underlying market drivers: Huge support programs by the respective Governments for various parts of their economies, quick and drastic liquidity support measures by the Central Banks and continued low interest rates levels.
And if you take a closer look at the indices, you can see that only a few single stocks are driving the markets, which represent a much larger relative weight in the indices and are not so much affected by the economic downturns: technology, health care and consumption. On the other hand, those companies, which were affected even harder by the consequences of the pandemic as regards turnover and profit (such as travel, airlines, banks. etc.) have a far smaller index weighting and their negative price development does not lead to index reductions. The markets know very well how to differentiate.
Another winner in the first half of this year is gold. Its reputation of being a “crisis winner” is only partially correct. Investors seem to hedge against future inflationary scenarios by putting it in their portfolios, while the metal could also profit from an overall rise of the commodity prices.
China is back on the investors’ agenda. It was the first to get in and out of the crisis, and its strength is reflected in the boom of its local stock market which is often overlooked, especially thanks to its clear technology leaders and its strong hand in the fight against corona. Chinese equities are the net winners of 2020 so far, and the trend should continue, as investors regard it more and more as an own dedicated asset class with higher weightings in the respective world indices.
While European economies slowly recover, mainly due to strong pushes by the central banks and monetary incentives for the consumers (such as reduction of the German VAT and the French and German European recovery plans), the fireworks of fiscal support in the USA are reaching their limits and the US governments have to agree on new packages before the end of July. Albeit employment numbers and consumer spending figures were better than expected, and both parties signal to come to an agreement on substantial infrastructure programs, the outlook for a democratic President together with potential tax increases and new regulation will lead some Wall Street investors to look closer beyond the Atlantic for some attractive European bargains which might lead to overweight of European shares for the next 6-12 months.
Overall, investors have to think more and more about strategic changes and long-term adjustments to their portfolios, e.g. government bonds, inflation hedges, or the right equity selection with companies that are realigning their business models for the time after COVID-19.