Monthly Commentary – May 2020

Global stockmarkets advanced in May as investors focused on new stimulus packages and the reopening of economies. However, this optimism contrasted with ongoing economic weakness and rising tensions between the US and China.

During the month, there were various signs that life was starting its journey back to normality. Japan lifted its state of emergency earlier than expected, US ongoing jobless claims declined (despite a large number of new job losses), and the UK began to ease its lockdown restrictions. Sentiment was also boosted – very briefly – when US biotech firm Moderna claimed to have achieved positive results from trials of its potential Covid-19 vaccine.

Meanwhile, new efforts by governments and central banks to reduce the economic impact of lockdowns added to the positive mood. In Europe, a €750bn recovery fund was put forward by the EU, while Japan unveiled a $1.1tn fiscal stimulus programme. China’s central bank promised “more powerful” policies to combat the slump and, in the UK, the Bank of England was actively considering negative interest rates. Despite these significant measures, it remains to be seen whether a sharp ‘V-shaped’ recovery for the economy is possible.

The simmering tensions between the US and China escalated further in May. President Trump threatened to “cut off the whole relationship” with China, which he blames for the spread of Covid-19. Meanwhile, Beijing’s moves to impose a controversial national security law on Hong Kong led to vocal disapproval from the US president, who promised “meaningful” action.

Despite its struggles to contain the coronavirus, Latin America provided the month’s strongest returns as the Brazilian real strengthened dramatically. It was followed closely by Japan, Europe (ex UK) and North America as these regions took steps to exit lockdown. Asia (ex Japan) was the main laggard, as Sino-US relations soured.

As optimism grew that an easing of lockdown measures would prompt a swift rebound, many of the market’s most economically sensitive sectors performed well. Information technology led the pack, followed by industrials, materials and consumer discretionary. The main laggards were real estate, financials, energy and consumer staples.

In the commodity markets, the oil price clawed back a substantial portion of its recent losses. This came as producers moved to curb supply while increased economic activity led to greater demand – alleviating the problem of oversupply.

In our portfolio, one beneficiary of optimism about economic reopening was US retailer Target. The rise of online shopping has caused many ‘bricks and mortar’ retailers to struggle. But many investors have overlooked those retailers that are rising to the e-commerce challenge. Target is a case in point. The company is adapting to take advantage of both online and in-store sales – a model that we believe will thrive as shopping habits evolve. As the US exits lockdown, we expect stocks like Target to play a full part in the economic rebound.

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.