Investment Views

14.05.2020
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May 2020

Here we summarise our Investment Committee's immediate outlook for the primary asset classes and major equity markets.

Investment Views for May 2020

  • Positive
  • Neutral
  • Negative
Asset Class Current View Outlook
Equities

After the meteoric recovery in the global equity markets since 23 March, the last few weeks has seen more of a gentle grind higher, and this is despite a regular flow of pretty awful economic data. This probably reflects the fact that firms are still getting finance and help in paying workers, and because the significant actions of central banks and governments may well have put a floor under the markets. Nevertheless, the easy money has probably already been made, and governments now have the huge challenge of deciding what is the correct balance between tightening and easing restrictions as they seek to fire up their economies. Although some companies have benefitted during this crisis from an increased demand for their goods or services, the outlook for corporate earnings for the majority of companies is hugely uncertain, and the effects of the global shutdown are expected to last for a long time. This is likely to put a lid on markets in the short-term. Over the longer term, equities are likely to offer the most attractive returns but just now the risks remain significant. With our current equity exposure, we continue to maintain our cautious approach and prefer developed markets.

Fixed Interest

Global government bonds yields remain unattractive, being negative in real terms in developed economies, although the asset class remains attractive within portfolios acting as ballast against risk-off periods. It is likely that we will see further easing by major central banks, especially the US, but the ability to act as a buffer in equity market sell-offs may begin to diminish given the historically low yield levels. At present credit (corporate debt) is relatively more attractive because of the yield premium over sovereign debt, and the significant levels of support of central banks through their asset-purchase programmes which includes corporate bonds. This creates a favourable backdrop, especially given that central bank actions should ensure that interest rates stay low for some time. Market liquidity is key, but the lessons learnt from 2008 should ensure that this doesn’t become a problem, although the severity of the downturn should lead to a tick up in the level of defaults.

Property

The impact of the coronavirus on economies has highlighted marked sectoral differences within the asset class. The performance dispersion at the sub-sector level is expected to continue. In the UK, healthcare, logistics, warehouses and supermarkets are favoured sectors and in continental Europe residential, logistics and warehouses are favoured. The retail sector is expected to remain extremely challenging for some time. Rental income is expected to remain relatively attractive from a yield perspective, but the resilience of the income stream may be tested in the coming months as the economic impact of the pandemic becomes clearer. Property valuations continue to be an area of challenge given the economic uncertainty. The short-term outlook is relatively clearer with other asset classes.

Alternatives

Industrial commodities – demand has suffered in line with the downturn in global economic activity. Supply disruptions together with a sustained recovery in China’s economy will give support to prices.

Oil – despite the significant supply cuts agreed by Opec+, the slump in demand caused by the fall in global economic activity means that the oil market will remain oversupplied in 2020. This will effectively cap any rise in prices.

Gold – the currency’s safe haven characteristics are likely to lead to further prices rises, as will a devaluing of fiat currencies.

Absolute return – offers the potential to dampen volatility and provide some downside protection, but returns are often moderate at best.

Cash

With UK interest rates at such low levels for the foreseeable future, the expected return is pitiful. However, cash can be a useful ‘shock absorber’ in volatile markets and remains a truly liquid asset.

Equity Region Current View Outlook
UK

See above comments in section denoted ‘Equities’

US

See above comments in section denoted ‘Equities’

Europe

See above comments in section denoted ‘Equities’

Japan

See above comments in section denoted ‘Equities’

Asia Pacific and Emerging Markets

See above comments in section denoted ‘Equities’

Risk warning: Investors should be aware that past performance of investments is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them may fall as well as rise. The content of this bulletin is for general information and reflects the general market view of Parallel Investment Management Ltd. - it should not be interpreted as recommendations or advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content.

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