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Equity markets last week recouped some of their decline the previous week, with global equities gaining some 2%. The fluctuations seen over the last month are a reflection of markets being buffeted by a range of conflicting factors:

On the economic front, the recent news has been quite encouraging. Retail sales in the UK and US bounced back more strongly than expected in May on the back of the easing in lockdowns. Even so, they are still well down on pre-Covid levels. Following this initial spurt, it is unclear how quickly they will recapture the remaining lost ground with an increasing divide between the can and the cannot.

Those who have had the good fortune to retain their jobs will generally have seen their savings rise during lockdown and will have money to spend, if they so choose. Those, by contrast who have been furloughed, face the risk of losing their jobs as government support schemes unwind over coming months and will probably be in anything but spending mood.

It will be critical how successfully the authorities manage the transition as businesses switch from state support to having to stand on their own two feet again. The danger is that a wave of bankruptcies and redundancies means the pace of recovery slows significantly later this year.

Whilst not as important as the Treasury’s direct support of individuals and companies, the Bank of England’s efforts to support the economy are not unimportant. Last week saw the BoE keep rates unchanged at a mere 0.1% but increase its quantitative easing program further. This should help ensure gilt yields remain at their current super-low levels despite the massive increase in government borrowing.

As regards the virus itself, the latest news has been mixed. Infections have picked up again in Beijing in China and Westphalia in Germany and continue to increase in several US states. But on the positive side, a cheap steroid drug has been found to significantly cut the death rate of those seriously ill with covid.

All this leaves equity markets looking set to remain choppy over coming months as sentiment fluctuates as to how quickly we can regain a semblance of normality. Indeed, with valuations back now on the high side, a market correction remains possible.

There are two sectors which have been clear winners from the virus – technology and healthcare. Covid has hastened the digitalisation of our world and reinforced the secular tail-winds already behind the tech sector. So, we plan to retain our exposures in that area.

As for healthcare, we have recently made a new allocation, taking advantage of the sector giving back some of its outperformance earlier in the year. Healthcare spending can only be increased by covid and the sector also has the attraction of rapid innovation in the biotech area, an ageing global population and relatively cheap valuations.

We financed this allocation by reducing some of our UK small and mid-cap exposure, where we have turned a bit more cautious. This area of the market has outperformed since markets bottomed in March but may struggle to continue to do so given its sensitivity to the economy and the tough environment which lies ahead. Essentially, these moves add a further layer of PPE to portfolios in this uncertain time.