July 2020 – Recovery continues

The recovery dynamics that started at the end of March continued during July. The economic and sanitary news, although worrying in the short term, are turning out better than expected and this encourages investors´ purchases. The huge amount of money injected by central banks is producing considerable price inflation in financial assets.  With the balance breakdown between supply and demand in large productive sectors due to people’s movement restrictions, money hardly flows into real economy. Proof of it is that FED´s balance sheet increase from 4 to 7 trillion USD so far this year has been accompanied by a reduction in M2 money velocity ratio from 1.426 to 1.097. This is producing huge imbalances in the price of certain assets and why it is key to be very selective in quality and high growth potential in the long term.

One of the most eye-catching effects of monetary injection is the USD depreciation during July (EURUSD goes up from 1.1234 to 1.1778) and consequently the increase of Gold (1,975.86 USD per ounce at the end of the month from 1,780.96). We have completely hedged USD exposure within flexible portfolio mandates and initiated moderate long positions in EUR. We are not buying Gold since it is an asset much more sensible to speculative moves and it doesn’t always protect on market corrections as we saw during March crisis. It will be a good hedge during a currency systemic crisis or a high upswing of inflation but this is not our main scenario.

In equities, Growth style has outperformed Value again (Russell 1000 Growth +2.64% vs Russell 1000 Value -1.06%). The highest appreciations came from industries that benefitted from consumption secular changes: Healthcare, Household Appliances, Air Freight & Logistics, Homebuilding, Tech Hardware, etc. All of them are products and services related to a higher usage of houses as a working, leisure and consumption facility, as well as the reactivation of health specialties that postponed their services due to confinement and movement restriction measures. Industries such as airlines, oil & gas, shopping malls and hotels have continued to weigh down indexes.  

Both government and corporate bonds remain at unattractive purchase levels and we continue to have zero exposure to them.

Looking ahead to the next few months, we are carefully monitoring the evolution of economic and health advances that we expect to improve and the momentous American elections, which may produce more volatility than the currently discounted by the market. On the one hand, polls place Biden ahead but it would not be wise to consider Trump buried at such an early stage.