Monthly Commentary – August 2020

In August, the stockmarket recovery resumed, taking global equities to new all-time highs. This apparently full recovery is deceptive, however. Many stocks are still significantly below their pre-pandemic levels – particularly those directly correlated with the state of the economy.

During the month, sentiment was bolstered by earnings reports that were generally less bad than feared and data that appeared to confirm that an economic recovery was underway. But Covid-19 has not gone away. Cases rose in Europe, prompting the tightening of measures in affected countries, as well as renewed travel restrictions. Despite that, various European leaders appeared to rule out a return to national lockdowns.

Signs of further progress towards an effective vaccine for Covid-19 also lifted investor sentiment. During the month, Russia became the first country to grant approval for a vaccine, although experts cautioned against deploying drugs that have not been fully tested.

Data from China, where the virus originated, suggested that the economic recovery is progressing well, with exports back to pre-pandemic levels and industrial profits rising at a robust pace. Tensions between the US and China continued to simmer, however, with the US imposing new restrictions on Chinese social media services WeChat and TikTok as well as telecoms equipment maker Huawei. Against that, trade talks later in the month were said to be constructive.

Stimulus measures have been an important salve for stockmarkets during the crisis. As a result, there was some unease over the expiry of the US’s enhanced unemployment benefits program at the beginning of the month. Republicans and Democrats failed to find a compromise, although executive orders from President Trump provided a temporary reprieve.

The extraordinary monetary stimulus applied by the world’s central banks has led many observers to predict rising inflation. Those expectations were reinforced by data showing that US consumer price inflation had risen at its fastest monthly rate since 1991. Meanwhile, the Jackson Hole symposium of central bankers confirmed that the US Federal Reserve is willing to allow inflation to run higher than its previous 2% target, removing a potential brake on continued stimulus. We believe that the inflationary effects of stimulus have important implications for investors.

Japan was the strongest equity market in August, despite late-month news that Shinzo Abe, the architect of the country’s sweeping economic reforms, would stand down as prime minister for health reasons. North American stocks also performed well, with Apple becoming the first US company to reach a market capitalisation of $2 trillion. The weakest region was Latin America. Brazil’s central bank and President Bolsonaro both indicated that there was limited scope for further stimulus.

The best performing sectors globally were consumer discretionary, information technology and industrials. Utilities, healthcare, real estate and energy were the weakest areas of the market.

As the Covid-19 pandemic accelerates changes in consumer habits, US retailer Target is showing how companies can adapt. Target’s efforts to increase its online sales and roll out more convenient store formats have been vindicated during the pandemic. Its second quarter results demonstrated its ability to gain market share – and the share price response made it one of our best performers in August.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.