Last week was quiet for equity markets with the second-quarter (Q2) 2020 earnings season now behind us and many market participants on holiday. European markets’ weekly volumes were the lowest of the year last week, and conviction was low. The MSCI World Index finished the week up +0.3%.1 US equities outperformed, with the S&P 500 Index up 0.7% and the technology giants once again market leaders.2 Elsewhere, both the STOXX Europe 600 Index and markets in the Asia Pacific (APAC) region closed the week lower.
US Technology Leading the Way Higher
It was notable that as US equity markets made fresh all-time highs, much has been made of the narrow breadth of this recovery from March lows, with a small group of technology stocks accounting for much of the rally.
Since March, the top five companies in the S&P 500 Index (Apple, Microsoft, Amazon, Alphabet and Facebook) have led the way and have seen their market capitalisation grow disproportionately.
For example, Apple’s market cap of US$2 trillion is almost equivalent to the entire UK FTSE 100 Index, which currently sits at US$2.2 trillion. The top five companies now account for more than a fifth of the S&P 500 Index, the biggest weighting for the top five securities since 1980. There has been much discussion around what is fuelling these gains; they are beneficiaries of the new “stay-at-home” norm, a tsunami of fiscal and monetary stimulus has kept government bond yields low, and the technology names have had strong balance sheet and cash-flow generation.
The question now is whether this trend will continue. The fate of tech stocks will likely be a key driver for equity markets globally into year-end. What we don’t know is whether the US presidential election in November will dent enthusiasm for these names, or how impactful the ongoing US-China trade dispute will be going forwards.
UK in Focus as Brexit Stalemate Continues
The latest round of Brexit talks ended on Friday and it was met with pessimism over the likelihood of a deal being struck in the next two months. Last week’s negotiations between the EU’s Chief Negotiator Michel Barnier and his UK counterpart, David Frost, were the latest attempt to bridge the longstanding chasm. However, progress was limited. According to reports, two of the key differences that remain relate to the so-called “level playing field” with regards to competition post-Brexit and EU access to British fishing waters.
In an attempt to speed up negotiations, the United Kingdom delivered a draft agreement to the EU to set out its version of a deal, but it appeared to be resoundingly rejected. On Friday, Barnier said it felt like progress on the negotiations were going “backwards, more than forwards”.
There are two more weeks left of negotiations in September before the EU Summit in October. The EU has noted that a deal must be ratified by the EU Summit deadline. Given last Friday’s comments, many observers see the true likelihood of a no-deal “hard” Brexit as increasing. This was reflected in the UK sterling, which finished last Friday down 90 basis points (bps)3 against the US dollar. UK equity performance was also mixed on Friday, with the domestically focused FTSE 250 Index up 0.2%, buoyed by the stronger-than-expected Purchasing Managers’ Index (PMI) report. Meanwhile, the exporter-heavy FTSE 100 Index was down 0.2%.
UK equities remain a global underperformer year-to-date, with both the FTSE 100 Index and FTSE 250 Index down 20% amid COVID-19 concerns and Brexit negotiations, which continue to weigh on sentiment. Comparatively, the STOXX Europe 600 Index is down just over 12% year-to-date.
Despite current bearishness around the United Kingdom, should a Brexit deal be struck and data continue to improve dramatically in the coming months (especially versus European peers), then sentiment towards UK equities should improve.
The Week in Review
European equities drifted lower on lacklustre summer volumes last week, with the STOXX Europe 600 Index closing lower. Sector performance showed some defensive rotation, with health care, real estate and food and beverage outperforming. Cyclicals underperformed, with banks, energy and automobiles the week’s losers. The “risk-off” skew was also evident in bond yields, which were lower across the region. German 10-year yields, for example, closed the week towards record lows.
Thursday’s European Central Bank (ECB) minutes were a talking point and suggested there was uncertainty over the economic outlook at the most recent meeting. The ECB did highlight risks are skewed to the downside, however, saying that “the breadth and scale of the recovery remained uneven and partial”. The upcoming September meeting will be important—it was implied that the central bank should have some more clarity at that point, suggesting that we may see policy changes at that time.
Eurozone PMIs in Focus: Services Stall
The key data points last week came on Friday in the form of (flash) European and UK PMIs. The European composite readings were lower in August and the services figures suggest that recovery in this area is stalling after a strong performance in May, June and July. The releases hit the euro, although this was not much of a surprise given the weaker tourism season and re-introduction of social distancing measures following the recent surges in COVID-19 cases.
We are also seeing households trying to save more given the ongoing risks to the job market. That said, the German services figure came in at a disappointing 50.8, which is a particular blow as the country had cut its value-added tax by 3% in July and tourist trade didn’t deal as hard a blow as in other countries.
Meanwhile, the French manufacturing figure unexpectedly fell into contraction at 49 and the pace of job cuts also increased again in August in France.
The eurozone manufacturing PMI did come in below estimates, but still held steady. It is also less worrying than the services PMI as forward-looking indicators continue to trend higher, with new export orders recovering. There was a particularly bright spot in German manufacturing output, which continued to move higher, helped by strong exports to China and Turkey.
Whilst the European data disappointed, the UK release looked strong, even with a similar picture of rising cases and local lockdowns. The composite reading came in at 60.3, led by the services sector as Chancellor Rishi Sunak’s “Eat out to Help Out” scheme provided a boost in August (although likely a temporary one).
Equities in the APAC region were also mostly lower last week, with the Shanghai Composite the bright spot as the only major index in the green. The Japanese Nikkei lost 1.6% as its second-quarter gross domestic product (GDP) release showed that all growth since 2011 had been wiped out, starkly illustrating the impact of the pandemic on the economy.
The recovery in China remains uneven, with Beijing having focused on infrastructure and production rather than transferring funds to consumers. The effects of the pandemic have exacerbated the wealth gap in China, with unemployment among low to middle-income adults now estimated to be more than twice the national average of 5.7%.4 This demographic has also been hit harder by a drop in disposable income, whilst high income households earned more on average in Q2 year-on-year.
With this, consumer confidence in the lower income brackets remains low, whilst luxury brands have staged an impressive recovery in China. More than a dozen luxury Western brands reported double-digit revenue growth in China in Q2 (vs Q2 2019), whilst sales in other regions were hit dramatically. The spending of the higher income bracket is not enough to offset lower consumer spending in the rest of the population, however, and China’s retail sales have fallen for five consecutive months since the pandemic spread in February.5
Tensions remain between China and the United States. The US broadened its sanctions, adding 38 new affiliates of Huawei to its economic blacklist in order to try to push Huawei out of the American technology supply chain, limiting the adoption of its 5G technology. Over the weekend, there were reports that Huawei and ZTE have now slowed down their 5G base station installation in the country, implying that US attempts to quash China’s technology ambitions appear to be working.
US equities outperformed their global peers last week with the S&P Index hitting new all-time highs, led by the technology giants. The S&P Index 500 Index finished up 0.7%, the Dow Jones Industrial Average finished flat on the week and the Nasdaq Composite closed up 3.5%. The variance in performance was quite stark.
US sector performance was interesting last week, with everything pointing to momentum. As noted, technology, the year-to-date outperformer, led the way once again, followed by consumer discretionary and communication services. It was the same at the other end, with the year-to-date laggard, energy, once again bottom of the pile, followed by financials and utilities.
Interestingly, the Chicago Board Options Exchange’s (CBOE) Volatility Index (commonly called the “fear index”) rose last week despite the gains in the major indexes. CNN’s Fear and Greed Index has also moved in recent months, with sentiment around equity markets creeping back towards Extreme Greed.
Last week’s July Federal Open Market Committee meeting minutes were largely a non-event.
There was a slight sentiment shift with regards to optimism around US economic growth in the second half of 2020, pointing to a highly uncertain path for the virus through autumn and winter. It is worth noting that uncertainty would be all the more impactful on the US economy if there is no progress on fiscal stimulus talks between the Democrats and the Republicans. With that, the desire of the Democrats to get a full deal agreed so close to the election has been questioned as any such deal may be seen to prop up support for the existing administration. The two sides are still locked in an impasse at the moment.
In terms of last week’s data, it started mixed, with the Empire Manufacturing Index for August missing expectations. However, homebuilder sentiment matched a record high. On Tuesday, data on housing starts and building permits came in ahead of expectations and are now back around pre-pandemic levels. On Friday, PMIs surprised to the upside as business activity improved dramatically. The composite figure came in at 54.7, which is the highest since February 2019, and points to a further recovery in economic growth from July’s figure of 50.3.
It is likely to be another quiet week. Focus in the United States will be on a the Federal Reserve’s virtual gathering in Jackson Hole, Wyoming, and the Republican Party convention.
Market holidays: UK holiday on 31 August and US Labour Day holiday 7 September.
Monday 24 August
- Economic/Political: The United Kingdom and the EU kick off a week-long informal meeting negotiating their future Brexit relationship.
Tuesday 25 August
- Data: Germany: (August) IFO, US consumer confidence
Wednesday 26 August
- Economic/Political: Bank of England’s (BoE) Andy Haldane speaks; ECB’s Isabel Schnabel speaks
- Data: France: (August) consumer conference, US durable goods
Thursday 27 August
- Economic/Political: Bank of Korea interest-rate decision
- Data: France: (August) business and manufacturing conference; Italy: (June) industrial orders
Friday 28 August
- Economic/Political: Band of England Governor Andrew Bailey speaks
- Data: Germany: (September) Gfk consumer conference; France: (Aug, preliminary) CPI; Italy: (August) consumer conference, manufacturing conference, (August) economic sent; eurozone: (August) economic survey; University of Michigan confidence survey
Views You Can Use
Insight from Our Investment Professionals
Many pundits have talked about “the Fourth Industrial Revolution,” but what does it mean? Franklin Equity Group’s Matt Moberg explains how the current pace of innovation is driving productivity gains—and accelerating economic growth. Read More.
Our Head of Equities Stephen Dover explains why he thinks possible changes to the US political landscape could lead to further bouts of market volatility. Read More.
There are five evolving growth themes that could generate considerable economic value over the next five to 10 years, according to Franklin Equity Group’s Matt Moberg. He explains how innovation can be found in any part of the economy and where his team is uncovering it for their portfolio. Read More.
Many investors seem to have misperceptions when it comes to Russia’s economy and the companies located there. Our Emerging Markets Equity Institutional Portfolio Manager Nicole Vettise explains how Russia’s economy offers investors a mix of old and new industries, and compelling areas of investment opportunity as a result. Read More.
As the global economy continues to grapple with the COVID-19 pandemic, there are still opportunities for investors, says Franklin Equity Group Portfolio Manager Don Huber. He has an eye on international companies able to navigate the crisis period—particularly those in regions where recovery is happening faster. Read More.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the team and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. The companies and/or case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
What Are the Risks?
All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.
3. A basis point is a unit of measurement. One basis point is equal to 0.01%.
4. Source: JD Digits.
5. Source: Financial Times, “Why China’s economic recovery from coronavirus is widening the wealth gap” 18 August 2020.