Alphabet soup

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Global equities last week gained 2.5-3%, reversing their losses of the previous week. This continued the see-saw pattern of late, which has left markets in local currency terms marking time over the last month following their initial sharp recovery from the March lows.

In sterling terms, however, global equites have continued to trend higher on the back of a renewed weakening in the pound as worries of a hard Brexit reappeared once again. The recent round of EU-UK trade negotiations broke up in tetchy fashion, with the two parties still miles apart and the UK adamant it will not seek to extend the transition period beyond year-end.

Whereas equity markets are still down 14% from their highs in local currency terms, they are only down 9% as far as UK investors are concerned. As regards to where markets go from here, it very much hinges on the shape of the forthcoming economic recovery.

A variety of letters of the alphabet – ranging from an L to a U, to a V, to a W and even to a Z – are all being used to describe the various possibilities. A sharp V-shaped recovery certainly looks pretty unlikely – as indeed Chancellor Sunak pointed out last week – unless a vaccine becomes available later this year. This remains very much a longshot despite President Trump launching Operation Wharp Speed to develop one. Most experts believe the middle of next year is the very earliest one can expect a vaccine to be available for mass distribution.

A better illustration of the forthcoming recovery than any of these letters of the alphabet might in fact turn out to be the Nike ‘swoosh’. Activity will recover but the bounce back won’t be that swift – aside from maybe the early stages. All of this will depend not only on the ability of the authorities to contain the virus but also on the whims of the consumer.

Personal savings rates are increasing sharply but it is far from clear how quickly consumers will either want to, or be able to, spend these new savings – even with shops now re-opening in the UK from 15 June. Unemployment is also rising rapidly, with the risk that this increase becomes entrenched and a further barrier to a rapid recovery.

Businesses, meanwhile, are turning a bit less gloomy. Confidence picked up in the US, UK and Europe in May, having fallen off a cliff in April. But still it is only back up to the lows of the Global Financial Crisis – hardly grounds for celebration.

As for the authorities, they have already unleashed unprecedented policy stimulus but more is on the way. The Bank of England is likely to expand its quantitative easing program over the summer and is also now contemplating cutting rates into negative territory – a move it has previously opposed. Indeed, short-dated UK gilt yields turned negative last week for the first time.

On the fiscal front, negotiations continue over a further major fiscal stimulus package in the US. And in Europe, the plan is to launch a €500bn recovery fund, although this is the subject of bitter wrangling between countries and not yet a done deal.

All said and done, there is still a tremendous amount of uncertainty about the shape of the forthcoming economic recovery. The markets appear a lot more convinced than we are that a V-shaped recovery is in prospect. Consequently, we are somewhat cautiously positioned and await a fall back in markets to put some cash to work at a more attractive entry point.