Active investment commentary & analysis

The return of economic growth following the initial impact of COVID-19

Macro-economic data provided continued support for European equity markets in August as Purchasing Manager’s Indices across the region indicated a return to economic growth following the initial impact of the global pandemic.

Germany in particular appeared to be firmly on the growth path with July industrial orders surging 27.9% over the June level. Such signals of recovery are of course all but mandatory if global markets are to sustain the returns we have witnessed since their sell-off in March 2020. Some level of growth was almost inevitable, but it will be the sustainability and the gradient of the recovery which we will have to focus upon in the coming months for more clarity on the resilience and strength of these initial shoots.

Comments from the Bank of England were hardly encouraging on this point as its Monetary Policy Committee, while keeping rates on hold in its August update, projected a relatively upbeat short-term recovery for the UK but for this to slow dramatically once the third quarter rebound is over and for pre-crisis levels of GDP not to be reached before the end of 2021. Gold’s move above $2,000 per ounce which suggested a similar cautiousness for many investors although heightened political tensions between China and the US may be a better explanation for the commodity’s record move. This was spurred by President Trump’s banning of US dealings with the owners of Chinese apps TikTok and WeChat. US tech companies with meaningful Chinese presence must have watched nervously as the situation developed. For Europe, the coronavirus development remained gloomy with Spain notably reporting a dramatic increase in the daily number of cases. Also of note was the strength of the Euro over the US dollar although not a phenomenon confined to the Eurozone as the greenback suffered against most major currencies over the course of the month.