Page 2 - ISQ UK July 2020

INVESTMENT STRATEGY QUARTERLY

Letter from the Chief Investment Officer

The Flag Was Still There

“Our hearts aching, our prayers praying, our flags waving, never forget.” These prescient words
spoken by the maker of the American flag, Betsy Ross, are just as true today as they were more than 240 years
ago. We ache for those who are suffering from COVID-19, economic hardship, and social injustice. We pray for
those protecting and defending liberty and justice for all.

We maintain our belief in the ‘American Dream’ as described by the downside risk to the economy. Fortunately, the Fed has not
James Truslow Adams, that “life should be better and richer and utilised the newly established programs to their full capacity
fuller for everyone, with opportunity for each according to just yet, so plenty of firepower remains. Similarly, Congress
ability or achievement,” regardless of social class or swiftly passed record-breaking levels of direct relief and more
circumstances of birth. We not only acknowledge but embrace could be provided soon, as ongoing negotiations have hinted at
that we have work to do as a society, and hope that this year will additional stimulus in support of the recovery rather than just as
serve as an inflection point as we advance toward a stronger and an emergency response. The cumulative actions built a pillar of
more united world. support for the US economy and helped avoid the doomsday
scenario.
As tumultuous as times are, we must always persevere. And so
it is our duty to provide you with our mid-year outlook on the When fear dominated the financial markets, US Treasurys quickly
economy and financial markets. earned their stripes as heightened demand pushed the entire
yield curve below 1% for the first time. The realisation of an
Whether it be wars, pandemics, financial crises, or bubbles economic rebound should push yields modestly higher (year-end
bursting, the global economy has a history of resiliency, and 10-year Treasury target 1.0%), but the upside will be limited.
even in the aftermath of the COVID-19 outbreak, it will be Despite record issuance by the Treasury in support of the
gleaming once again. The scale of the global lockdown likely economy, interest from the Fed, foreign buyers, retirees, and
caused the most significant global recession in the post-World institutions should keep demand steady. The Fed followed the
War II era. However, it will likely be the shortest recession on lead of other global central banks and expanded the scope of its
record as the dawn’s early light of a recovery is signaling a purchase programs to include investment-grade and municipal
robust rebound in the second half of 2020. Leading indicators bonds, so its ongoing purchases should lead spreads to narrow
and real-time activity metrics suggest the ‘bottom’ occurred in further. Therefore, we favour these sectors over high-yield bonds
April, as countries eased restrictions, labour market conditions (of which global central banks including the Fed are only buying
improved and consumer spending was revitalised. Admittedly, a small portion) which are subject to heightened risk due to the
the depth of the decline (possibly -35% quarter-over-quarter expected uptick in defaults. If investing in the high-yield sector,
annualized gross domestic product (GDP) in the second quarter selectivity will be critical given the high exposure to energy
for the United States) means it will take time for any economy companies and brick-and-mortar retailers, which have arguably
to return to pre-COVID-19 GDP levels. For the United States we suffered the most due to the outbreak.
expect this will not occur until the end of 2021 at the earliest. As
a result, our forecast is that US GDP for 2020 will be -5.3% before We pledge our allegiance to US equities, which have benefitted
accelerating to 4.9% in 2021. from aggressive policymaker action, states reopening their
economies, and promising vaccine clinical trials. Despite the
Until the recovery is evident from sea to shining sea, Congress recent rally, we remain confident equities will move higher over
and the Federal Reserve (Fed) will make sparks fly through the next 12 months, surpassing our year-end S&P 500 target of
fiscal and monetary stimulus efforts. The Fed took 3,111, as post-recessionary periods have historically been
unprecedented steps to alleviate investor fears, improve credit supportive of the equity market. Our bias toward US equities
market functionality, and provide liquidity in order to mitigate over international equities isn’t based on patriotism.

Investment Strategy Quarterly is intended to communicate current economic and capital market information along with the informed perspectives of our investment
professionals. You may contact your wealth manager to discuss the content of this publication in the context of your own unique circumstances. Published July 2020. Material
prepared by Raymond James as a resource for its wealth managers.

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