Progress in the process of healing - Increasing allocations to equities and high yield

In the June edition of our Global Market View publication, we provided an update on why the divergence between macro and market, while extreme, is less puzzling than appears at first glance. Since then, more evidence of the global economy regaining strength has appeared across Asia, Europe and the US, most recently in the form of increasing business confidence across the world’s most important economies. On 1st July, this included the relatively new Chinese Caixin Manufacturing PMI, which surprised with a reading slightly above 50, and the most important of the world’s business surveys, the US ISM manufacturing survey, which surprised significantly on the upside with a reading of more than 52 and a larger jump in new orders. On July 2nd, this was followed by positive surprised in the US labour marker reports, including an estimated more than 4 million new jobs created in June. During the month, Central Banks have confirmed their commitment to supporting the recovery more or less independently of the cost. In Europe, the indirect underwriting of both banks and sovereigns has been extended through long term lending at low interest to the financial sector. In the US, we note that equity markets had corrected less than 10% when the Fed found it appropriate to add to their QE program by easing the restrictions on their purchases of corporate bonds, including purchases of bonds newly downgraded to high yield, the so called “Fallen Angel” category. Congress is now working on securing more lending for smaller companies.

In our June edition, we also set out the basic steps from a macro and market recession to a recovery. As seen in data on retail sales, consumer confidence and corporate activity surveys, the recovery is making steady progress. Notwithstanding the occasional set back in markets associated with a less than linear progress with the Covid virus, recent developments in both equity and credit markets also point to a more normal functioning of markets, both in terms of primary and secondary activity and also directional drivers. All of this shows through in various forms in our algorithms, which have continued to move higher. As the respective thresholds have been reached, we have been adding equities and high yield bonds to our various funds and strategies.

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