Market overview
Even though markets ran out of steam last month, June still crowned one of the strongest quarters for capital markets in decades, with positive returns in almost all asset classes. The S&P 500, for example, performed better than at any time since 1998, with a rise of 20.5% (in total return). June itself contributed less than half a percentage point to this outcome which is why the other regions, especially emerging markets and the Eurozone, were, quite unusually in recent times, able to outperform U.S. equities in June. This was due in part to cyclical sectors such as basic materials, banks and industry, although once again the front runner was technology, with a gain of 5.9% in June and 26.3% in the second quarter as a whole. Despite the strong second quarter, most stock markets have still lost ground year to date, with the MSCI AC World Index down by 5.5%. The exception remains the Nasdaq 100, which is almost 17% ahead. Among sectors the laggard, despite a strong second quarter, is energy, which has lost around a third of its value since the beginning of the year – in line with the global oil price. However, the front runner across all major asset classes was gold, which has gained 17% this year. It was closely followed by another supposed safe haven, 10-year U.S. Treasuries, which have a total yield gain of 14%. Once again, the price of gold has correlated closely with 2-year U.S. government bond yields, in particular. If these are adjusted for inflation expectations, the correlation is even more striking. At the same time, however, the low U.S. real yields also show that the bond markets are taking a much more negative view on economic prospects than stock markets, whose valuation levels, especially in the United States, are once again at record high levels. The current price-to-earnings ratio of over 21 – based on estimated profits for the next twelve months – was last seen around the turn of the millennium. At that time, however, bonds were still providing decent yields.
Covid-19 remains, sadly, central to the monthly review. Even if in most regions, especially Europe, easing of lockdown was the main focus, with a corresponding positive economic impact, by the end of the month the headlines were dominated by renewed lockdown in more and more U.S. regions. The lack of a lockdown or its premature lifting explains why the roughly 20,000 daily new cases in the United States at the end of May had grown to over 40,000 by the end of June. Whether markets will react more to this is likely to depend to a large extent on when and to what extent the death toll rises. So far, it has not yet risen in the United States but it hasn’t yet had time to.
Other political – and partly economic – headlines in June were the upsurge in the Black-Lives-Matter movement in the United States, still smouldering Brexit and the U.S.-Chinese trade dispute. China's dealings with Hong Kong may give an indication of its willingness (or not) to compromise. In July, some Hong-Kong laws, (mostly related to public security) were largely adapted to the Chinese model. This could be a disadvantage for the financial centre – as the poor performance of the Hang Seng Index compared to the MSCI AC World Index or the Chinese CSI 300 suggests. No lack of political issues offer scope for excitement in July: the German EU Council Presidency that has just begun, Putin's efforts to be crowned perennial President, or the struggle in the U.S. Congress for a continuation of rescue packages, especially cash payments to households.
Outlook and changes
In our opinion the summer months will be characterized by a further increase in investors' risk appetite, based on the economic recovery and the supportive central-bank policy. This favors both corporate bonds and equities. The latter could additionally benefit from the fact that, according to surveys, institutional investors are still underweight. However, optimism is dampened by equities' stretched valuations, the virus that continues to spread in many regions of the world, not least the United States, and the prospect that the economic recovery could significantly lose momentum from the fourth quarter. Our baseline scenario remains that pre-crisis gross-domestic-product (GDP) levels will not be reached until the first quarter of 2022 in the United States and the second quarter of 2023 in the Eurozone. Things are already much better in China, where we continue to feel comfortable with our 2020 forecast of economic growth of one percent.
We assume that regional corporate earnings will follow a similar course to our estimates for the pace of GDP growth in different regions of the world, although this effect is likely to be mitigated by the disproportionately high role played by exports in listed companies' sales. Against this backdrop we consider consensus earnings estimates for 2021 and 2022 to be too optimistic. From a tactical point of view we believe stock markets have moved very far ahead of economic fundamentals.
We have not changed our tactical equity signals over the past month. We still do not have any clear regional preferences. However, in Europe we prefer small caps and in the United States exactly the opposite. At the sector level, technology and healthcare remain our favorites. We believe healthcare is also a good sector to hedge for a possible strong second wave of Covid-19, even though the U.S. election campaign is likely to bring some volatility to the sector. We upgraded the materials sector to neutral last month, given the positive outlook we see for selected cyclical value stocks.
In bonds there have been some tactical changes. In the short term we do not foresee sufficient dynamism in U.S., European and emerging-market government bonds to end the sideways trading. We have therefore shifted to neutral everywhere, except Spain, which we like as it profits from the ECB packages and makes good progress with the pandemic. We continue to take a positive view of the corporate-bond sector, even though the potential for further spread tightening has certainly diminished. In Europe, new issues in the investment-grade segment are gradually declining, as are estimates of default rates in the high-yield segment. As in Europe, corporate bonds in the United States are being supported by central-bank purchases. In currencies we see the euro and pound weakening again against the U.S. dollar in the short term.
The multi-asset perspective
Stock markets made only small gains in June but our tactical portfolio view on equities remains slightly cautious. In order to be able to benefit from the ongoing economic recovery, however, we believe a higher weighting consideration in European equities is advisable – and it simultaneously increases the cyclical and the value bias of the portfolio. On a global level, growth stocks have recently resumed their long-term trend and performed better than value stocks, but this trend is being created by only a few big cap stocks. In general, we believe that equities from industrialized countries currently offer a better risk-return profile than those from emerging markets.
We remain cautious on government bonds, even if the upward trend in yields has recently turned sideways again. If yields rise somewhat over the summer months in the course of the economic recovery, government bonds, especially U.S. government bonds, could become more interesting again for diversification reasons alone. However, our focus continues to be on corporate bonds, with investment-grade bonds preferred to those in the high-yield segment, and Europe slightly preferred to the United States. Outside equities and bonds, we believe gold remains an important component of a diversified portfolio.
Past performance of major financial assets
Total return of major financial assets year-to-date and past month
Past performance is not indicative of future returns.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 6/30/20
Tactical and strategic signals
Fixed Income
| Rates | 1 to 3 months | until June 2021 |
|---|---|---|
| U.S. Treasuries (2-year) | ||
| U.S. Treasuries (10-year) | ||
| U.S. Treasuries (30-year) | ||
| German Bunds (2-year) | ||
| German Bunds (10-year) | ||
| German Bunds (30-year) | ||
| UK Gilts (10-year) | ||
| Japan (2-year) | ||
| Japan (10-year) |
| Spreads | 1 to 3 months | until June 2021 |
|---|---|---|
| Spain (10-year)[1] | ||
| Italy (10-year)[1] | ||
| U.S. investment grade | ||
| U.S. high yield | ||
| Euro investment grade[1] | ||
| Euro high yield[1] | ||
| Asia credit | ||
| Emerging-market credit | ||
| Emerging-market sovereigns |
| Securitized / specialties | 1 to 3 months | until June 2021 |
|---|---|---|
| Covered bonds[1] | ||
| U.S. municipal bonds | ||
| U.S. mortgage-backed securities |
| Currencies | ||
|---|---|---|
| EUR vs. USD | ||
| USD vs. JPY | ||
| EUR vs. JPY | ||
| EUR vs. GBP | ||
| GBP vs. USD | ||
| USD vs. CNY |
Equities
| Regions | 1 to 3 months[2] | until June 2021 |
|---|---|---|
| United States[3] | ||
| Europe[4] | ||
| Eurozone[5] | ||
| Germany[6] | ||
| Switzerland[7] | ||
| United Kingdom (UK)[8] | ||
| Emerging markets[9] | ||
| Asia ex Japan[10] | ||
| Japan[11] |
| Style | |
|---|---|
| U.S. small caps[23] | |
| European small caps[24] |
Legend
Tactical view (1 to 3 months)
- The focus of our tactical view for fixed income is on trends in bond prices.
- Positive view
- Neutral view
- Negative view
Strategic view until June 2021
- The focus of our strategic view for sovereign bonds is on bond prices.
- For corporates, securitized/specialties and emerging-market bonds in U.S. dollars, the signals depict the option-adjusted spread over U.S. Treasuries. For bonds denominated in euros, the illustration depicts the spread in comparison with German Bunds. Both spread and sovereign-bond-yield trends influence the bond value. For investors seeking to profit only from spread trends, a hedge against changing interest rates may be a consideration.
- The colors illustrate the return opportunities for long-only investors.
- Positive return potential for long-only investors
- Limited return opportunity as well as downside risk
- Negative return potential for long-only investors
Appendix: Performance over the past 5 years (12-month periods)
| 06/15 - 06/16 | 06/16 - 06/17 | 06/17 - 06/18 | 06/18 - 06/19 | 06/19 - 06/20 | |
|---|---|---|---|---|---|
|
Asia credit |
7.4% |
3.1% |
-0.7% |
10.0% |
5.4% |
|
Covered bonds |
3.6% |
-0.8% |
1.0% |
3.2% |
1.0% |
|
Dax |
-11.6% |
27.3% |
-0.2% |
0.8% |
-0.7% |
|
EM Credit |
5.8% |
7.0% |
-0.4% |
11.1% |
4.9% |
|
EM Sovereigns |
9.8% |
6.0% |
-1.6% |
12.4% |
0.5% |
|
Euro high yield |
2.2% |
9.8% |
0.8% |
5.2% |
-2.2% |
| Euro investment grade |
5.0% |
1.2% |
1.1% |
4.8% |
-0.5% |
| Euro Stoxx 50 |
-13.0% |
24.2% |
2.1% |
6.1% |
-4.5% |
| FTSE 100 |
3.8% |
16.9% |
8.7% |
1.5% |
-13.7% |
| German Bunds (10-year) |
8.4% |
-3.5% |
2.6% |
5.7% |
0.8% |
|
German Bunds (2-year) |
0.4% |
-0.8% |
-0.3% |
-0.3% |
-0.9% |
|
German Bunds (30-year) |
21.4% |
-10.8% |
5.3% |
13.3% |
4.5% |
|
Italy (10-year) |
11.3% |
-3.5% |
-1.4% |
8.8% |
7.3% |
|
Japanese government bonds (10-year) |
6.0% |
-2.4% |
0.7% |
2.0% |
-1.3% |
|
Japanese government bonds (2-year) |
0.5% |
-0.5% |
0.0% |
0.0% |
-0.4% |
|
MSCI AC Asia ex Japan Index |
-12.0% |
26.7% |
9.9% |
-0.5% |
1.7% |
|
MSCI AC World Communication Services Index |
-0.7% |
-5.2% |
-7.7% |
10.2% |
7.3% |
|
MSCI AC World Consumer Discretionary Index |
-7.8% |
18.7% |
14.5% |
2.7% |
8.2% |
|
MSCI AC World Consumer Staples Index |
9.9% |
2.1% |
-2.9% |
6.8% |
-2.3% |
|
MSCI AC World Energy Index |
-9.2% |
-2.6% |
20.4% |
-10.6% |
-36.6% |
|
MSCI AC World Financials Index |
-16.3% |
30.1% |
2.0% |
0.4% |
-19.7% |
|
MSCI AC World Health Care Index |
-6.1% |
8.0% |
3.8% |
8.0% |
13.0% |
|
MSCI AC World Industrials Index |
-2.4% |
19.9% |
4.2% |
4.5% |
-9.3% |
|
MSCI AC World Information Technology Index |
-0.2% |
34.0% |
24.8% |
8.6% |
30.4% |
|
MSCI AC World Materials Index |
-11.1% |
22.1% |
11.4% |
-3.0% |
-7.1% |
|
MSCI AC World Real Estate Index |
6.4% |
0.5% |
2.4% |
6.9% |
-12.9% |
|
MSCI AC World Utilities Index |
8.8% |
0.6% |
0.1% |
10.7% |
-4.8% |
|
MSCI Emerging Market Index |
-12.1% |
23.7% |
8.2% |
1.2% |
-3.4% |
|
MSCI Japan Index |
-8.9% |
19.2% |
10.5% |
-4.2% |
3.1% |
|
Russel 2000 Index |
-8.1% |
22.9% |
16.1% |
-4.7% |
-8.0% |
|
S&P 500 |
4.0% |
17.9% |
14.4% |
10.4% |
7.5% |
|
Spain (10-year) |
12.2% |
0.0% |
3.7% |
9.4% |
0.8% |
|
Stoxx Europe 600 |
-10.4% |
18.8% |
3.5% |
5.1% |
-3.8% |
|
Stoxx Europe Small 200 |
-10.8% |
24.8% |
8.9% |
0.7% |
-3.4% |
|
Swiss Market Index |
-5.5% |
14.9% |
0.0% |
18.8% |
4.9% |
|
U.S. high yield |
1.6% |
12.7% |
2.6% |
7.5% |
0.0% |
|
U.S. investment grade |
7.6% |
1.8% |
-0.6% |
10.3% |
9.1% |
|
U.S. MBS |
3.8% |
18.5% |
-12.5% |
64.3% |
52.2% |
|
U.S. Treasuries (10-year) |
9.4% |
-4.0% |
-1.8% |
10.1% |
12.8% |
|
U.S. Treasuries (2-year) |
1.4% |
-0.1% |
0.0% |
4.0% |
4.1% |
|
U.S. Treasuries (30-year) |
19.8% |
-7.4% |
-0.1% |
12.3% |
25.4% |
|
UK Gilts (10-year) |
11.5% |
-0.6% |
0.7% |
5.7% |
6.3% |
Source: Bloomberg Finance L.P., DWS Investment GmbH as of 7/1/20
Past performance is not indicative of future returns.
2. Relative to the MSCI AC World Index
3. S&P 500
5. EuroStoxx 50
6. Dax
8. FTSE 100
9. MSCI Emerging Markets Index
10.
MSCI AC Asia ex
Japan Index
11. MSCI Japan Index
12. MSCI AC World Consumer Stables
13. MSCI AC World Health Care Index
14. MSCI AC World Communication Services Index
15. MSCI AC World Utilities Index
16. MSCI AC World Consumer Discretionary Index
17. MSCI AC World Energy Index
18. MSCI AC World Financials Index
19.
MSCI AC World
Industrials Index
20. MSCI ACWI Information Technology Index
21. MSCI AC World Materials Index
22. MSCI AC World Real Estate Index
23. Russel 2000 Index relative to the S&P 500
24.
Stoxx Europe Small 200 relative to the Stoxx
Europe 600
25.
Relative
to the Bloomberg Commodity Index
