Like home-schooled children during the Covid crisis, markets seem to be struggling to pay attention for long.
For parents, one of the most difficult parts of lockdown has been home-schooling their children. My social media feed has been full of people tearing their hair out as long-forgotten concepts such as subordinate clauses or trigonometry have come back to haunt them.
Not only that, they’ve faced the challenge that professional teachers tackle every day: how to get children to pay attention for any period of time.
Stock markets during the Covid-19 crisis have shown that it’s not just children who can suffer from an attention deficit.
Since the initial slump, the incredible performance of shares as the pandemic has spread around the world, causing hundreds of thousands of deaths and causing untold economic damage, shows that investors have perhaps not been paying enough attention.
Sluggish return to normal
While Covid-19 grabbed their attention initially, they were soon distracted by the immense stimulus provided by central banks and governments. This continues to drive markets higher, glossing over some underlying concerns.
Now, as infection rates in the US spike significantly, it could be time to refocus. Another tragic rise in deaths could be in store in the world’s largest economy, and put the brakes on any nascent recovery. I’m not sure that markets are prepared for this.
Even if there is not a return to lockdown, the economic impact could be felt as a result of rising Covid-anxiety among consumers. After all, this is a consumer-led recession and anxious consumers will be slow to go out and resume their normal spending habits.
Keeping the economy afloat
I saw evidence of this when I made a rare visit to the office last week. The City of London remains a virtual ghost town, even though a number of shops, pubs and restaurants have reopened. My US colleagues report the same from New York. Normality feels a long way off for us and for the rest of the developed world.
Consumption is not about to explode because of government measures such as those announced by UK chancellor Rishi Sunak on Wednesday. They are a rescue package to just keep the economy afloat, not to spark it to life.
As we head towards the autumn, complacent investors may get a wake-up call. The furloughing of staff may be masking some of the negative effects of the lockdown, and as furlough measures are removed job losses are likely to accelerate.
What does it mean for assets?
I think it’s probably too early to be outright negative on the outlook for equities, which would be to go against the power of central banks as they continue to underpin the market rally. But at the same time I think it is too late to be bullish about equities, given the reasons I’ve already mentioned. Neutrality seems right for the time being.
While we’re sitting on the fence with equities, we have more conviction in the areas that will continue to benefit from the immense liquidity being provided by central banks.
This means we remain positive on gold. Even though it’s performed strongly, recently hovering around the $1800 level, which is near to a record high, we think there could be potential for further gains. People often describe it as a hedge (a form of protection against loss), but it’s behaving more like risk assets such as shares. Gold is one of the main beneficiaries of the support measures.
Similarly, we still favour corporate bonds, both investment grade, as well as non-investment grade, high yield bonds. These are also major beneficiaries of the stimulus measures and yields remain relatively attractive.
However, as the Covid-19 crisis evolves and other major issues such as November’s US election and Brexit loom, we’ll certainly need to pay close attention and not get distracted.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.