Further to our previous updates please find below our latest commentary on the continued impacts of the Covid-19 virus on the investment markets and the wider economy, as of Thursday 30th July. We will continue to provide regular information and further observations to help support our clients.
The continued surge in US Covid-19 cases and the subsequent move back to partial lockdown is starting to affect confidence levels of investors in American markets. The US dollar is the clearest indication of this, experiencing falls over recent weeks. In addition to virus cases, disagreements between Republicans and Democrats over a second round of economic support packages are dragging on the dollar, as delays to further payments and watering down of existing support is expected to weaken the recovery. A major beneficiary of the lower dollar has been gold, which given its pricing in dollars and its safe-haven status, often performs well when the US struggles and has been rallying strongly recently.
Also experiencing a stronger performance of late is the Euro and European equities. Investors exiting the dollar and searching for a new home have been a significant factor in this trend, but another is the building sense of solidarity within the EU. Last week a €750bn EU recovery fund was agreed, including €390bn of grants. This facility has been developed to aid the recovery of those economies most hit by the coronavirus crisis. Funding will be sourced from EU-wide bonds, the first time this will happen. So far borrowing has not been conducted with joint liability of EU member states. This represents a significant development in EU integration.
In managing the European economy, the European Central Bank has been on its own in delivering coordinated pan-European financial stimulus. The ECB is only responsible for monetary policy, however. Until now, fiscal policy has been carried out by national governments only. The EU Recovery fund and its joint ‘Eurobonds’ are a large step towards co-ordinated fiscal policy. We believe this will be seen as a major step forward for the EU and should reduce the risk of future recoveries being hamstrung by uncoordinated fiscal responses.
Not all is rosy for our continental neighbours, however, with virus numbers picking up in a range of areas, and especially so in Spain. As has been well publicised, this has led to the British government to re-impose 14 day quarantines on travellers from Spain. This will severely impact tourism in the country, but also British airlines. This action highlights the fragility of industry based on international travel at the current time. While policymakers are keen to reopen economic activity as much as possible, this is a reminder that the course of the virus will continue to be the defining factor in the economic recovery.
Our view continues to be that market conditions will remain highly fearful in the short term, however, there will come a point when sentiment will turn, when markets have fully priced in the economic pain to be caused. When this will occur still remains uncertain, but the time of growth will come again. We believe that over the medium term we can expect a reasonable recovery in terms of economic activity and stock market levels.
Our philosophy is that no one can predict the peaks and troughs of financial markets with any accuracy and it has always been extraordinarily difficult to time when the best (peaks) and worst (troughs) are. Timing the stock market is extremely difficult, so we believe it is best avoided. Volatility is a part of investing which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets. Taking a multi-asset approach means that some assets can fair better in different market conditions as they are more defensive assets such as bonds, whereas during periods of growth equities tend to fair better.
Armstrong Watson, in addition to our full range of accountancy services, also have access to fund management expertise from the Future Money asset management team, as well as independent expertise from the wider market. We are able to use this to help provide insight, commentary, advice and support to our financial planning and wealth management clients.
At the current time we continue to believe the appropriate course of action for most clients is patience. Some clients also continue to see this as an opportunity, with equities clearly still lower priced than they were at the start of the year, however, our philosophy remains that it is time in the market not timing the market, which is usually the best approach.
We also believe that for those people who are considering taking financial advice that now would be a good time to do so, whilst we know the current tax allowances, reliefs and opportunities that remain fully available for those in a position to utilise them.
For more information and guidance on Investing, please download our handy guide to Investing here.