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Five factors investors must take heed of in the second half

Posted by Adrian Lowcock in Press releases category on 15 Jul 20

2020 has been an unprecedented year. At the start of the year, no one would have predicted that a global lockdown would be in place just three months later, with things we took for granted (like eating out) now something many people won’t risk doing.

Against such a backdrop, the first 6 months of 2020 have been amongst the most volatile markets ever recorded as large parts of the world ceased to operate. A severe sell-off in March was followed by a dramatic rally as investors weighed up first the horrific human and economic cost of the virus and then switched to focus on the unprecedented response from central banks and governments.

Are we through the worst? Adrian Lowcock, head of personal investing at investment platform Willis Owen, says investors must proceed with caution now, with multiple risks still facing markets.

“Many countries are beginning to come out of the other side of lockdown, and people are slowly venturing out into shops, pubs, restaurants and more. However, this doesn’t mean that markets are out of the woods yet, and investors should remain cautious,” he said.

“When thinking about investing you should always keep an eye on the long-term horizon, 2020 has proved that you should also keep one eye on the short term, and there are plenty of danger signs facing equity markets.”

Below, Lowcock identifies five trends to look out for in the second half of 2020: 

Weak US Dollar

The US dollar had been strong for the best part of a decade, but since its March high the currency has been falling.  A combination of stimulus from the Federal Reserve creating more US dollars, low savings, and high levels of Government debt could mean a weaker US dollar is here to stay. That would be good news for Emerging Markets where companies borrow in US dollars, as a weaker currency makes their borrowing costs cheaper.  

US / Chinese trade war 

This was the biggest fear for investors for most of 2019, and although an initial agreement was made at the start of the year, more recent events mean tensions between the two countries are rising.  Markets so far have shrugged off the trade tensions as they focus on the more immediate issue of COVID-19 and the impact that is going to have on the world. As the recovery from the pandemic continues, the focus for investors may shift to the other headwinds the global economy faces.

Disappointment in progress over vaccine

Any progress in finding a Vaccine for SARS-COV-2, or a treatment for COVID-19, has been met with a rally in markets and usually a bump in the share price of the pharmaceutical company that is linked to the drug.  Hopes of an early breakthrough are high, but finding a vaccine is a herculean task – usually it takes 10 years to do so.  Stockmarkets are often optimistic and prone for disappointment, and that remains a key risk. 

Extreme valuations

Equity markets have rallied strongly, but the rally has been fairly narrow, and primarily led by Technology stocks which have been seen as winners of the lockdown and able to gain market share from old economy competitors. It is impossible to know when the momentum driving the valuations of some technology companies will stop, but as the share prices rise further the risks of significant losses increase. Fear of missing out has gripped investors this year. 

Economic recovery

In the second half of this year economic data assessing the path out of the downturn will be all important. Economies should be functioning more efficiently than during lockdown, and so the data will be more accurate and give a better reflection of economic activity and employment. Given the strong rebound in employment data in the US, investors have been more hopeful of a “V” shaped recovery thus far. However, if pent up demand tapers and unemployment remains high investor euphoria might be replaced as a U or W shaped recovery suddenly looks more likely.