Central banks will win the tug of war in asset markets

Financial markets are being pulled in different directions by two big forces: the injection of liquidity from central banks and concerns over a “second wave” of Covid-19 infections.

Daily news headlines can lead us to believe that, of the two, coronavirus is the dominant force for markets. The coming months are likely to show that it is not. Investors should back central bankers to win this tug of war, and set up their portfolios accordingly.

Policymakers around the world responded to the pandemic with unprecedented scale and speed. While they continue to support riskier assets, such as stocks and corporate bonds, through vast asset-purchasing programmes and rock-bottom interest rates, the most important thing investors can do is to stay invested.

In particular, we think the UK and German equity markets are likely to outperform, even though we expect Europe’s overall earnings recovery to lag other regions.

The composition of the UK stock market, which trades at a sizeable discount to other major markets, leaves it well placed to benefit from the global recovery from Covid-19. Some 40 per cent of the benchmark FTSE 100 group, by market capitalisation, is made up of value companies — meaning they trade at a low valuation compared with their earnings or assets. These should…

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