Monthly Market Pulse: August 2020

A 2021 recovery remains in sight thanks to a rebound in activity, extensive economic policy support and growing prospects of a vaccine. Indeed, after a less severe global recession than previously feared in Q2, a rebound is now expected in the third quarter, but its magnitude could be dampened by renewed Covid19 cases in a number of countries, notably in the US. Activity strongly rebounded in May-June with the end of lockdowns and fewer Covid19 cases. Confidence has returned and consumption has strongly rebounded in all major countries. Furthermore, joint budgetary and monetary support is now happening in all major countries and this new regime should stay in place as long as growth prospects remain fragile.

Chart of the month: Progressive recovery in sight despite clouds in monthly indicators

Source: UBP. * MER: market exchange rates. PPP: purchasing power parity.

Politics

• Economic policies should continue to support the ongoing rebound, as US and Europe are set to implement new budgetary measures, adding to existing monetary stimulus.
• With the European Commission having struck an agreement to fund its EUR 750 billion European Recovery Fund, Europe looks set to transition from stabilising its economy following the Covid19 shock to funding efforts to spur recovery and growth in 2021.
• In contrast, still hampered by rising infections, the US is plagued by political infighting over an additional round of economic relief measures going into autumn. With formal campaigning for the Presidency set to begin this month, historically, this has been a challenging time for markets should a change in White House occupant appear likely.

Business & Economics

• After a sharp recession in H1, economic activity should rebound in Q3 and recover progressively in 2021. Renewed COVID cases in several countries, notably in the US, could yet weigh on a Q3 recovery, but no renewed global lockdown appears in sight.
• With interest rates close to zero, government bonds are increasingly challenged as a safe haven asset. Together with still volatile equity markets, this favours alternative investment products such as P2P lending which has seen growing interest recently.

Real Estate

• The Nationwide House Price Index shows UK house price growth rebounded strongly in July as activity bounced back. The bounce back in prices reflects the unexpectedly rapid recovery in housing market activity since the easing of lockdown restrictions.
• The 1.5% YoY and 1.7% MoM price increase in July means that house prices are up by 2% on a year-to-date basis compared to the first seven months of last year.

Equity Markets

• Amid continued Covid19 uncertainty and ongoing US-China tension, investors have welcomed solid Q2 earnings. However, guidance adds to evidence that the recovery will be choppy with big differences from one company to another.
• Dollar weakness as well as relatively attractive valuations provide a tailwind for emerging markets, especially Asia corporate debt where fundamentals remain solid and defaults are particularly low versus US. However, selectivity with a focus on high-quality credit is key with the resurgence in political tension between China and the US.

FX & Commodities

• Gold continues to perform with interest rates nearing zero and ongoing monetary support. We believe gold and silver are in the early days of a longer-cycle bull market.
• OPEC’s decision to increase production looks likely to add pressure to the US equity’s energy sub-sector of high yield credit, which has contributed as much as 150 bps to spread compression since the March highs.

As you will have seen in recent emails, we had our strongest months in June and July. Our underwriting team at Blend Network remain very busy assessing deals to ensure we continue lending to experienced property developers who come to us with a solid project, an enviable track record and a strong exit strategy. Keep an eye for new loans coming at www.blendnetwork.com.

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