Adrian Lowcock, head of personal investing at Willis Owen, outlines five trends the investment platform considers will affect markets during then remainder of 2020.
2020 has been an unprecedented year, with the first six months amongst the most volatile markets ever recorded, as large parts of the world ceased to operate.
A severe sell-off in March was followed by a dramatic rally as investors weighed up first the horrific human and economic cost of the virus and then switched to focus on the unprecedented response from central banks and governments.
Are we through the worst? Investors must proceed with caution now, with multiple risks still facing markets.
Many countries are beginning to come out of the other side of lockdown, and people are slowly venturing out into shops, pubs, restaurants and more. However, this does not mean that markets are out of the woods yet, and investors should remain cautious.
When thinking about investing you should always keep an eye on the long-term horizon. 2020 has proved that you should also keep one eye on the short-term, and there are plenty of danger signs facing equity markets.
Below are five trends to look out for in the second half of 2020.
Weak US dollar
The US dollar had been strong for the best part of a decade, but since its March high the currency has been falling. A combination of stimulus from the Federal Reserve creating more US dollars, low savings, and high levels of government debt could mean a weaker US dollar is here to stay. That would be good news for emerging markets where companies borrow in US dollars, as a weaker currency makes their borrowing costs cheaper.
US / Chinese trade war
This was the biggest fear for investors for most of 2019, and although an initial agreement was made at the start of the year, more recent events mean tensions between the two countries are rising. Markets so far have shrugged off the trade tensions as they focus on the more immediate issue of COVID-19 and the impact that it is going to have on the world. As the recovery from the pandemic continues, the focus for investors may shift to the other headwinds the global economy faces.
Disappointment in progress over vaccine
Any progress in finding a vaccine for SARS-COV-2, or a treatment for COVID-19, has been met with a rally in markets and usually a bump in the share price of the pharmaceutical company that is linked to the drug. Hopes of an early breakthrough are high, but finding a vaccine is a herculean task and even good news might not meet investors’ hopes. Stock markets are often optimistic and prone for disappointment and that remains a key risk.
Equity markets have rallied strongly, but the rally has been fairly narrow, and primarily led by technology stocks which have been seen as winners of the lockdown and able to gain market share from old economy competitors. It is impossible to know when the momentum driving the valuations of some technology companies will stop, but as the share prices rise further the risks of significant losses increase. Fear of missing out has gripped investors this year.
In the second half of this year, economic data assessing the path out of the downturn will be all-important. Economies should be functioning more efficiently than during lockdown, so the data will be more accurate and give a better reflection of economic activity and employment. Given the strong rebound in employment data in the US, investors have been more hopeful of a “V” shaped recovery thus far. However, if pent up demand tapers and unemployment remains high investor euphoria might be replaced as a “U” or “W” shaped recovery suddenly looks more likely.