Equities made further gains in May. Markets continue to be acutely sensitive to news flow on the spread of the disease. Confidence is fragile but progress remains positive. Those countries that have relaxed restrictions have yet to see a meaningful second wave. There will, of course, be setbacks along the way but we are more optimistic than we were six to eight weeks ago. Economic data continues to be heavily distorted by the nature of the lockdown. The severity of the slowdown has considerably reduced the utility of much of the higher frequency economic data that investors often use to identify inflection points. Nonetheless, here as well there are some signs of encouragement.
The most notable feature of returns over the month was the substantial outperformance of ‘growth’ versus ‘value’. As we have commented before this is not a surprise given the current market backdrop. Economic activity has collapsed and central banks have committed to hold interest rates at abnormally low levels for the foreseeable future. Liquidity has exploded with money supply ballooning. This creates almost the perfect backdrop for ‘long duration’ growth stocks. Indeed, many of this year’s strongest performers are companies seeking to benefit from ‘disruptive’ technologies whose economic payback will not be seen for many years. We aren’t averse to ‘growth’, nor oblivious to the risk of an outdated world view, but seek to ensure that any reward is commensurate with the risk taken. In a paradigm characterised by a central bank backstop the extent to which valuation matters, however, is a legitimate debate. The pattern reversed slightly towards the end of the month as some tentative improvements in the economic data began to emerge.