Weekly View - Looking for guidance
Growth data released last week painted a stark picture of the damage done by the pandemic. Although the July purchasing-manager figures confirm that China is well on the road to recovery (and explain why it remains our favourite pick in the emerging-market space), the euro area economy declined by 15% year on year in the second quarter and US GDP by 9.5%. These could be the worst readings for both economies. But we persist in thinking that in both places the recovery will be long and uneven, with a lot of time needed before lost growth is recuperated. The surge in virus cases in parts of the US has already halted the decline in weekly initial job claims, and a lot of jobs in tourism and leisure are not coming back soon. Continued consumer anxiety about the pandemic is likely to lead to higher savings and reduced spending growth. Much hinges on the fiscal stimulus package being debated in Congress, with the eventual approval of a package worth USD 1 trillion set to prop up the US economy in the coming months (although not the US dollar, which we see continuing to lose ground).
A lot, too, will hinge on who Joe Biden chooses as his running mate for the presidential elections. Given Biden’s age, and assuming he wins in November, the next vice president could find herself with greater power than her predecessors. Some of the candidates are quite radical and might well give the Tech Titans a tougher ride than the one they had in Congressional hearings last week.
But for now, Big Tech is basking in the sun, largely benefiting from the pandemic and therefore making outsized contributions to market performance. Yet signs have emerged that investors are beginning to baulk at lofty valuations, even in tech. And while markets in general have been helped by 2Q earnings that have been better than (low) expectations, banks, particularly in Europe, are having to contend with a big rise in loan loss provisions. Together with an uncertain economic outlook that prevents companies from issuing guidance, this suggests markets could see-saw in the coming months, with the broad trend ‘flattish`. We therefore remain tactically cautious on equities overall.