A new normality in the markets

The second quarter of the year ends and we pass the equator of 2020 with a significant recovery in the stock markets. Few expected such behaviour after the end of the first quarter, where the falls in the markets were of 30%, reaching 40% at times. In this quarter, for example, our Loreto Óptima Individual Plan has risen 8.33%, or the funds of Loreto Inversiones, our funds management entity, which have obtained returns of 7.11%, 15.21% and 15.28 % for the Loreto Premium Mixed, Global and Mixed Variable Fixed Income, respectively, recovering a good part of the decrease in the previous quarter.

In this second part of the year, and the “new normal” has just been released, the fear of a second wave of coronavirus that ends up causing a resurgence of restrictions, with the consequent impact on recovery, begins to grab headlines in the press in recent days.

As the investment director, José Luis Garcia Muelas, comments, in the article https://www.elconfidencial.com/mercados/2020-06-20/nintendo-oro-como-proteger-carteras-segunda-ola-covid_2647711/ we are sceptical of the occurrence of a second pandemic wave of SARS-CoV-2 with characteristics similar to the first, leading to general confinement of the population and the collapse of the health system for several reasons. Social distancing measures, the use of masks, greater hygiene and the performance of massive tests allows more effective control of the outbreaks that are appearing in the different countries that are opening up to the new normality. Recent cases in Spain or in other countries are a good test to confirm the ability of governments to control second outbreaks.

Coronaviruses are not flu. The history of the second pandemic influenza outbreaks, diseases characteristic of autumn / winter, show that in the 20th century there were three of them. Two of them, the Asian and Hong Kong influenza, were less lethal than the first ones. The third one, the 1918 flu, was more lethal but its spread occurred in exceptional circumstances during the First World War and without social distancing. In any case, health systems are more prepared and medical treatments are more effective.

Added to this is research on treatments and vaccines. The news about Moderna or Oxford, among others, make us have good hopes of finding a vaccine and producing it before the end of the year. The genome sequencing of the virus was carried out in China in January and was made available internationally to scientific centres around the world from the outset. The money that is being invested, the coordination of international studies and trials and the commitment of the different countries are key to being optimistic.

When asked how these outbreaks will affect the markets, our opinion is that we will contain and take advantage of dips for fear of the outbreak to buy companies that benefit from Europe’s recovery plan in the industrial and 5G sectors. Other topics that we like and that go beyond sprouts are health, pharmaceutical and biotechnology companies, as well as those dedicated to hygiene products. All of them, with attractive evaluations, have received a strong boost after the coronavirus and that positive trend will continue beyond the vaccine.

The technology sector receives a special mention. The coronavirus has accelerated the implementation of some trends that were being observed such as teleworking, telemedicine, online commerce, last-mile logistics … This, together with some types that are going to remain low for a long time, has caused many of these companies to return to set highs. Fundamentally, many of these companies are expensive, but they can stay that way for as long as interest rates remain so low, and a rebound would give them an extra boost. But all that glitters is not gold, certain signs appear in the sector such as the excessive participation of retail investors, which make us increasingly prudent and selective in that sector.

In addition to the outbreaks, we identified other factors that can generate volatility in this second part of the year, the US presidential elections in November and the lack of a clear winner, a new pulse in the trade tensions between China and the US or the negotiations on the Brexit among others. We hope that volatility will continue to be established in the markets in the short term, although the possibility that we are witnessing a drop in the rate of recovery in activity has to be opposed to the expectation of the introduction of greater stimuli by the monetary authorities and governments, and therefore the liquidity provided, should sustain the market and generate additional profits in the medium term.

Departamento de Inversiones

Loreto Mutua M.P.S.