Equity strategy and market outlook – June 2020

In this month’s strategy piece, Alastair notes that US COVID-19 cases have reached a new daily high, reminding investors that the epidemic is not over. Public policy is however shifting away from costly lockdowns and towards less intrusive forms of virus control. As the biological effectiveness of this new approach remains uncertain the risk of a second wave of infections remains in place. For now, global earnings estimates have stabilised at lower levels. Cuts to consensus forecasts have been severe with US equities now expected to deliver a decline in EPS of 10% in 2020 while net profits in Europe are expected to fall 25%. Equity valuations remain remarkably robust, given the circumstances. Valuations for the largest 600 global corporations have bounced sharply while European equities have lagged, reflecting the weaker corporate performance. We remain cautious on equity markets and believe investors should proceed with caution. Global equity valuations are now discounting a progressive re-opening of the economy. This is only one scenario in our view and at this stage a fits-and-starts trajectory cannot be ruled out.

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