Market Insights – July 6, 2020

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

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Essentials

The ISM manufacturing index in the USA moved back into expansionary territory last week, reaching a 12-month high, and close to five million jobs were created in June, causing unemployment to drop to 11%. But will the renewed surge in infections in some states break this momentum?

US small caps were hit particularly hard by the crisis and are lagging way behind blue chips. However, they could make up considerable ground as the economy gets back on track, especially since analysts’ expectations are very conservative.

China’s domestic ‘A’ market, represented by the CSI 300 index, has risen more than 12% so far this year. This is one of the sharpest increases among the world’s major stock markets. The recent rebound was mainly driven by private investors, who pushed the Chinese market to a five-year high.

The euro is poised to appreciate

All countries may be tempted to weaken their currencies during a global economic downturn, but the US usually wins at that game. This was certainly true in the wake of the 2008 financial crisis. The Americans normally use a combination of aggressive fiscal policy, very loose monetary policy and a weakened greenback to navigate economic storms. And now most other governments are trying the same tricks to kick-start their economies. But US-dollar interest rates have dropped sharply since the start of the crisis, making the States a zero-rate market. This has sharply reduced the greenback’s appeal, especially since the country’s twin fiscal and trade deficits continue to expand. Now that the worst of the COVID-19 pandemic is behind us, investors could start looking for safe-haven alternatives to the US dollar. Like the dollar, the Japanese yen tends to do well during periods of tension on the financial markets before experiencing outflows once the crisis is over. So among the major reserve currencies, the euro is best positioned to gain ground as the global economy recovers. Despite its recent economic difficulties, the eurozone still has a current account surplus with most of its trading partners. The pandemic has also led to greater solidarity between richer northern countries and southern countries. At least for now, political initiatives such as the EU stimulus fund and debt mutualisation seem to have brought an end to the centrifugal forces that have tested the EU and its single currency in recent years. We have increased the euro’s weighting in portfolios and decreased that of the US dollar. Unless there is a major second pandemic wave in developed countries, the return to growth should also boost certain secondary currencies that were hit hard by the crisis, like the Norwegian krone and some emerging-market currencies.

The two tech extremes

You’ve probably never heard of Meituan Dianping, JD.com or Pinduoduo. These leading online retailers have a combined market capitalisation of USD 300 billion and are all between five and seven times bigger than Zalando, a more familiar name here in Europe. ByteDance, with a market capitalisation of USD 75 billion, is still not very well known here either. But this unicorn – a term used for non-listed startups worth more than USD 1 billion – developed TikTok, an app that’s very popular among fans of short-form videos. These are just a few examples of the Chinese companies making up the eastern tech ecosystem, which came into play at the same time as Silicon Valley in the west. The Chinese tech sector is about more than just Tencent and Alibaba. CQQQ, an ETF consisting of Chinese tech securities, like its US counterpart QQQ, has gained 24% since the start of the year, after rising 33% in 2019. One of the short-term risks is that the US may force Chinese companies that are traded as American depositary receipts (ADRs) out of the New York Stock Exchange. But those that are also listed elsewhere – like on the Hong Kong Stock Exchange – are less at risk. The option of converting to a secondary listing makes these shares fungible. Alibaba has been listed in Hong Kong since November 2019, and others have announced plans for a secondary listing in the months ahead. The COVID-19 pandemic has sped up the digitisation of the economy. While it’s too early to know whether the trend towards deglobalisation will continue, this could be another reason to invest in companies that are focused on the domestic economy and that will be boosted by the tech revolution in emerging-market countries.

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