Financial markets continued their upward trend in June on the back of the automatic rebound in activity following the gradual easing of lockdown measures. After the support provided by central banks and governments via injections of liquidity, it was the turn of economic figures to boost investor morale. The economic surprise index rebounded very strongly, with the global economy’s gradual recovery being reflected in the activity statistics. This rebound in activity could also be reflected in the next corporate earnings season beginning in mid-July in the United States.
Although the rebound in economic indicators is most definitely reassuring, we do not believe it should be confused with a V-shaped recovery, which would see the economy quickly return to pre-lockdown levels. This acceleration should not come as a surprise as the economy moves out of a period of forced hibernation. On the other hand, in our opinion, the question of the structural impact of this crisis remains very much open. Government and corporate debt have soared, which will definitely restrict longer-term growth. Similarly, restructuring announcements by large companies (Airbus being the latest example) underscore the fact that employment will not emerge unscathed from this crisis.
Therefore, we believe that current equity market valuation levels are to some extent optimistic. This is especially true given the soaring rate of new COVID-19 cases in the southern states of the US. Therefore, we do not feel that an overly aggressive positioning is appropriate during the summer period, which is sometimes marked by bouts of volatility. We have thus partly scaled back our diversified funds and reopened hedges.