Equity markets recovered well in the second quarter. The S&P 500 in the US gained 20% (with a rise of 1.8% in June) having lost 20% in the first quarter, whilst Europe’s EuroStoxx 600 was up 12.5% (1.7% in June) after a first quarter loss of 23%. Thus, the US index is down only 4% since the beginning of 2020 and is up 5% over the past 12 months, at the cost of a stretched price/earnings ratio (21.9, or 19.8 excluding the ‘GAFAM’ companies), which could narrow if the risk premium returns to average levels. The European index, down 13% year-to-date and 6% over the past 12 months, has so far shown less optimism and its P/E of 18.2 leaves room for gains in the event of a return of the risk premium to average levels.
In other words, investors currently seem to have decided to close the book on the Covid-19 pandemic as quickly as possible, treating it as a transitory phenomenon with the main effect of further releasing the largesse of central banks. It has also resulted in a first serious step towards greater European solidarity with the €750 billion Merkel-Macron plan, assuming this is not derailed by the vagaries of the European decision-making system. Meanwhile, the rise in the PMI lead indicators back towards the threshold of 50 points in June (47.5 in the euro zone and 46.8 in the USA) has provided comfort to the optimists.
The first warning has, however, come from the Fed, whose Chairman noted on 11th June that it is too early to count on a rapid, or ‘V-shaped’, recovery. Whilst it is possible to see the health crisis as a phenomenon exogenous to the economy, it is also a fact that the crisis is persisting, if not worsening, in the USA (43,000 new cases of Covid-19 on 30 June, from 21,000 on 31 May) and is depressing economic activity. The IMF has further downgraded its forecasts of growth in the global economy in 2020 (from -3% in April to -4.9%) and even 2021 (from 5.8% in April to 5.4%). For a rational investor, therefore, prudence is the watchword.
The only bet we are prepared to take is on rationality, ignoring as best possible any explicit or implied scenario as to the speed and scale of the recovery from the health crisis. We remain committed to a selection of stocks based on two key pillars: the quality of the companies in the portfolio and their valuation, despite the fact that some would have us believe that the second of these pillars, the Value component, is no longer relevant and will no longer be so. Nor are we convinced by the argument that there is a new paradigm for this crisis and this recovery, as in previous crises.
From this point of view, June was relatively favourable to the compartments of the SICAV, which had previously been negatively affected by the presence of a Value component alongside their Quality components. The first half performances of Valeurs, Europe, Évolution and Patrimoine were not satisfactory at -18.6%, -23%, -8% and -4.7% respectively, but they all made gains in June thanks to their exposure to this Value component, Valeurs rising 2.4%, Europe 3.2%, Évolution 1.2%, and Patrimoine 0.4%.