Market Insights – August 24, 2020

Each week, a team of experts shares its market views with you.

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Essentials

The US dollar has stabilised over the past few days. We think a brief technical rebound could be possible after the dollar’s sharp depreciation in recent months. The greenback has dropped close to 9% against the euro and 7% against the Swiss franc since end-May.

Industrial metals ­– and especially copper – are continuing on their uptrend, exceeding their early-year highs as demand picks up and inventories remain low. Prices are still far from their all-time highs, however.

Huawei has once again been caught up in the fraught US-China tensions. On 17 August, Washington imposed licence requirements for all business conducted with Huawei, thereby restricting the Chinese company’s access to US technology and considerably reducing visibility for its suppliers and 5G customers.

Emerging markets – an uneven return to normal

While visibility concerning the pandemic has improved, the risk of a second wave hitting before a vaccine becomes available is holding back consumer spending in some emerging markets. In China, the economy is returning to normal at two different speeds, with manufacturing output bouncing back quickly and the services sector recovering at a much more sluggish pace. Lockdown restrictions have prevented people from spending on travel, eating out and entertainment, all sectors that will continue to bear the brunt of social-distancing rules.

Although Asian countries ended their lockdowns before most developed countries, consumer spending is returning to normal more quickly in the USA and Europe, where cash injections have directly benefited consumers. As a result, demand from developing countries has absorbed the supply of emerging-market exports, despite the gradual trend towards deglobalisation. 

There have also been major disparities among emerging markets. In Asian countries, the public-health and economic crises are mostly under control, while in countries like Brazil and India the number of infections hasn’t peaked yet and now largely exceeds those recorded in Europe. The scope for recovery also varies from country to country, since not all of them can afford to bring in stimulus packages worth 10% or even 20% of their GDP.

What will the ‘new normal’ be for emerging markets? After the recent stock-market rally, valuations are in line with their long-run averages and should remain so provided that output picks up before the end of the year and earnings grow by around 30% in 2021. Investors’ tolerance for bad news and negative surprises has shrunk, while their optimism has pushed prices to new highs. Volatility is likely to remain high, even though a weaker US dollar should be a boon for emerging markets.

 

USA – a new record high but what’s next?

After several attempts, the USA’s main stock-market index, the S&P 500, finally ended the week at a new all-time high. For the stock markets, COVID-19 is over – at least for now.

In the past few weeks, we’ve seen positive newsflow coming out of the USA. The number of new infections seems to be under control after a brief rise. And macroeconomic indicators have positively surprised investors throughout the summer. Q2 corporate earnings figures were better than expected too.
US equities may now need to take a breather, as the rally seems a little rushed. This has made US shares expensive – even more so than they were at their peak in February. And while earnings beat the forecasts and prompted earnings estimates to be revised upwards, they were not high enough to reduce valuations, which still stand at 22x forward earnings. Finally, indicators suggest that investors are now generally optimistic and that the S&P 500 is overbought. What’s more, volatility is at a six-month low.

Indexes could well take some time to di-
gest their recent rally before the start of a busy period for politics, with the US elections likely to cause some disruption. While we remain constructive on the USA over the long term, we are concerned that investors may be overly complacent in the short term and too focused on certain sectors, such as technology.

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