July 2020

Third Quarter 2020

View from the Square

After a deeply challenging first quarter for risk assets, Q2 of 2020 has been paradoxical in nature. In this period, the US (and many other regions) are likely to have experienced one of the worst contractions in GDP in history, and yet the S&P 500 index has managed to achieve its best quarterly return in two decades. How so, and what might the summer months have in store for investors?

In past recessions or business cycles, stocks have tended to bottom (or top) when leading indicators of the economic backdrop have bottomed (or peaked). There is evidence of this now, following a sudden and severe collapse over a period of just a couple of months, with the trough in leading economic activity likely having occurred in April this year. Markets, however, tend to look six months in advance and – where there are signs of an economic recovery – can rise, even if the economic backdrop is still recessionary. Also, recoveries following unexpected shocks have tended to be more rapid than those following recessions that arose from accelerated market cycles. The pandemic (COVID-19) would certainly seem to qualify as an unexpected shock. It is worth noting that the S&P 500 itself has a significant concentration in technology stocks, which have fared much better – both going into and coming out of the crisis – than other developed market peers (including the FTSE 100).

Looking forward, we do believe the road will be bumpy ahead for markets. On the plus side, investors do have more clarity on what they are dealing with now: COVID-19 has moved from being a known unknown (we know there is a pandemic, but we do not know how bad it will get and what the impact will be) in March, to a known known (we now have a much better understanding of the disease, how to handle it and a path to economic recovery) in June.  The world does have a lot of adjusting to do now though –  it is unlikely that the world will return to business as usual in the coming months and that we are very much in the learning to live with it phase when dealing with the virus, which will undoubtedly present social, political and economic headwinds. 

For investors, the months ahead will present opportunities and challenges, as markets move with sentiment around the virus and ensuing impact. Our positioning has a cautious stance, favouring assets that still present value in the equity space, which is now pushing us towards more cyclical sectors and away from the US market, blended with assets that can help with any further shock to growth and the potential for inflationary forces to emerge down the line. Gold and related assets remain a core element in portfolios, serving a range of investor requirements. 

Opinions constitute our judgment as of this date and are subject to change without warning. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it may go down as well as up. Interested parties should seek advice from their Investment Adviser. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority. Registered in Scotland SC231678. Registered Office Edinburgh Quay, 133 Fountainbridge, Edinburgh EH3 9BA.


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