Performance, August 2020



Historically strong reporting season in the wake of the coronavirus crisis

  • Whether the analysts or the corporate sector have been too pessimistic. Whether the corporate sector has been better than feared at handling the changed market conditions. Or whether the coronavirus crisis has slowed down faster than first assumed. This is an unanswered question but statistics have shown that the Q2 reporting season was one of the most positive surprises for a long time. More specifically, it was the best reporting season in the US since 2000 as analyst estimates were beaten by 17%, 90% of the companies reported positive surprises and 59% of the companies beat expectations of both revenue and earnings. The broadest ever. Maybe based on an easy basis of comparison, but still an important source of the upturn of the equity markets in especially the US which reacted with the sharpest monthly increase since 1976.

The Fed announced changes

  • Simultaneously with an increase in particularly US equities, the dollar has fallen back. The focus of attention has been the Fed’s monetary policy – and with expectations of short-term US rates remaining at an extremely low level for a long period of time – and this has spilled over into the dollar, among other things. After its Jackson Hole conference, the Fed, as expected, changed its inflation target to an average target. And this is an important source of the continued low short-term US interest-rate level.

The presidential candidates to the coming election in the US have officially been nominated

  • Both Democrats and Republicans officially nominated their presidential candidates in July. The most interesting aspect in this respect was, however, the nomination of the Democratic vice presidential candidate. Joe Biden selected 55-year-old Kamala Harris, Howard graduate, previous district attorney and Californian senator. She has a reputation of being at the centre-left wing politically and also has a firm grip on the Afro American population as well as other immigrant groups. Therefore, Joe Biden’s selection is considered a wise move. Although he has a solid lead in opinion polls, nobody seems to dare predict that Donald Trump has already been beaten. Since he has the ability to make the population shift focus – most recently with new attacks on Chinese companies.

Market performance

Historically sharp US equity price increases

  • August was a favourable month for global equity markets – strongly boosted by the US which saw the strongest monthly increase since 1976. The historically steep increases came in the wake of a very strong reporting season and back-up from the Fed which announced low interest rates for a long time to come. The positive signals fully overshadowed the coronavirus-related economic challenges which are far from over for the global economy. Economic indicators and infection numbers did, however, not show anything which gave rise to new concern, and this was sufficient to result in record-high equity prices.

Calm bond market with slightly rising yields

  • In the Danish bond market, the yield level was slightly on the increase in August – yet, primarily for long-term bonds. The market has been dominated by a moderate issue volume and a solid demand. This has led to an overvalued relative valuation of ‘flex loan’ bonds as well as callable bonds. Returns were somewhat mixed in August. As a result of the slightly increasing interest-rate level, government bonds have generally yielded negative returns. ‘Flex loan’ bonds yielded returns close to zero. The long-term callable bonds yielded small negative returns whereas the more defensive callable bonds yielded small positive returns.

Debt restructuring in Argentina and Ecuador

  • In August, Argentina and Ecuador succeeded in signing an agreement with global investors on a reduction of debt payments via lower interest payments and a reduction of the principal. Zambia and Lebanon may be the next candidates with weak and debt-ridden economies. Bonds issued in external debt yielded a return of 0.32% and the credit spread narrowed by 0.2 percentage point to 4.23 percentage points, but in addition US and European yields rose by approx. 0.20 percentage point. The credit spread started the year at 2.9 percentage points, peaked at 7.21 percentage points and has hence caught up considerably. Bonds issued in local debt shed 1.09% as the market across the board saw interest-rate increases and currency depreciation in problem countries such as Turkey, Brazil, Chile and Argentina.        

Credit markets in August

  • Following a very positive July the trend in credit and yield spreads was moderately positive in August. The High Yield spread narrowed by approx. 0.20 percentage point whereas the Investment Grade spread narrowed by approx. 0.04 percentage point. Generally, the market is still staging a comeback after Covid-19 and does not seem to be particularly affected by infection numbers anymore.  Consequently, the more Covid-19 sensitive sectors such as insurance, leisure and transport have performed well recently, whereas especially health care, consumer discretionary and media have slowed down a shade. All in all, August was, however, a relatively calm month.