13 July - update from our investment partner
- 13th July 2020
Asian and European markets have begun the week with a positive tone
What has happened
Asian and European markets have begun the week with a positive tone as investors look beyond the pickup in US new cases towards a stimulus-infused economic recovery. In the US new cases continued to accelerate with the hotspot states also seeing an increase in fatalities however the ratio of cases to fatalities is still far lower than the first wave.
EU Recovery Fund back on the agenda
The focus this week will be on the EU summit on Friday where the European Council will hope the proposed €750bn package, split between €500bn in grants and €250bn in loans, will be sweetened by a budget rebate for fiscally conservative states. This latest step is an olive branch to the fiscal four however half a trillion euros of non-repayable grants may still prove too much to the fiscally conservative Northern bloc. EU documents note that this is a ‘one-off emergency instrument, put in place for a temporary period and used exclusively for crisis response and recovery measures’, and therefore somewhat different to a permanent mutualisation of debt. With all 27 EU members needing to agree on any proposal, the risk remains that the package ends up disappointing in both pace and scale. This could leave the EU as a relative underperformer against more ambitious and coordinated policy responses being delivered elsewhere in the world.
Earnings season begins
This week 32 US companies and 57 European companies report as the global Q2 earnings season begins in earnest. Our focus for the quarterly results will not be the backward-looking damage in Q2 but more the forward guidance as economies continue to reopen. Within European earnings we will also be looking for guidance around the sensitivities to US imports and exports, as the economic opening there looks to be in jeopardy given the recent surge in US new case growth.
What does Brooks Macdonald think
If the economic recovery continues and the developed world avoids a return to the lockdowns seen in March and April, the Q2 earnings season will largely be viewed as an abomination rather than a sign of things to come. Even if earnings miss expectations, as long as the COVID-19 disruption is viewed as temporary this should not derail the market recovery. The key for Q2 2020 earnings will be the corporate narrative for the recovery and guidance in a world less impacted by the daily swings of new case growth.
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