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A widely held view in the market is that equities are due for a sharp correction, given the amount of underlying risks, such as the high debt levels, the possibility of a new wave of infections, and the rising tensions between the US and China.

While we accept that these are important risks, we remain, on balance, optimistic. The S&P 500 rally since late March was characterised by a very high dispersion, the highest since the tech bubble burst, in 2001: in May, the top quintile of industries in the SnP essentially recovered all the losses.

This pattern is consistent with the observation that, for the top performing industries (which include internet, biotech, pharma, software and entertainment), earnings and overall demand have been strong, and will likely remain strong in the years ahead. Meanwhile, in the bottom quintile, where industries have been particularly hurt by the pandemic, prices are still around 34% below the peak.

We are not convinced by the argument that equities must trade lower, especially if we consider that interest rates are significantly lower than they were in February. While it is hard to predict the exact path of equity prices, we think US equities may continue to follow the ‘three-steps-forward-one-step-back’ price pattern.

The above article is an extract from our regular fund manager commentaries.

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[1] This was underscored by the ECB, in a remarks by Executive Board Member Fabio Panetta on July 7th, 2020, ‘Unleashing the euro’s untapped potential at global level’


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