A recap of the H1:2020 performance, as global equity markets seek direction
As H1:2020 draws to a close, global equities markets are seeking direction, being slightly off their May highs, as coronavirus infection rates continue to rise and a number of US states (Texas, Arizona, North Carolina) put on hold the phased reopening of their economies. Equity market volatility has increased in the past two weeks, with the S&P500 VIX index at 33%, its highest level since mid-May (see graph page 3). However, the S&P500 is set to witness its strongest quarterly performance on a price basis since Q4 1998, following its COVID-19 related sharp decline in Q1. Overall, global equity markets have recovered a large portion of their Q1 decline, with significant deviation across regions and sectors (see graph below).
US Information Technology (Apple, Microsoft) sector has over-performed significantly in H1:2020, as earnings expectations remained robust relative to the market during the course of the market selloff and the subsequent rebound. We rank S&P500 sector Year-to-Date returns relative to EPS expectations for the period 2021/2019 on Table 1 (page 3), with IT scoring best on both metrics.
Traditional cyclical sectors such as Industrials, Energy, Financials and Consumer Discretionary, excluding Amazon, have over-performed their Defensives peers (Consumer Staples, HealthCare, Utilities) tactically in the past 4-6 weeks, in line with the improvement in economic activity, hard data and business surveys (PMIs – see Economics) from exceptionally low levels.
While greater mobility and higher infection rates are obviously correlated, the recent resurgence of COVID-19 cases could stall the improvement in consumer activity and debt business spending, thus halting the positive price dynamic of Cyclical stocks. A disruptive COVID-19 second wave, which could lead to renewed lockdowns, is the key risk in H2:2020.
Regionally, euro area equities have rebounded since early May (SXXE:+9% vs SPX:+5% in EUR terms) as: i) the relaxing of the lockdowns are processing smoothly; ii) the ECB has loosened (temporarily) its asset collateral rules on top of the large expansion of its PEPP asset program to EUR1350 bn (11% of GDP vs current use of EUR346 bn) by mid-2021; iii) Germany has expanded its fiscal spending stimulus to above 8% of GDP and, most importantly, alongside France, has put forward the EUR750 bn “Next Generation EU” initiative (including the Recovery and Resilience Mechanism).
A sustained shift overperformance in H2:2020 requires, inter alia, an uninterrupted improvement in European and global growth, which will support Financial and export-oriented stocks, with a largest weight in the euro area equity index relative to the US equity index.