Your Autumn Newsletter 2020

Market Overview


Q3 2020 saw most markets build further on the gains made through Q2. Quite the feat when you consider the almost endless list of headwinds that appear to be facing every country and asset class. Even more impressive is, at the time of writing, markets are ahead of where they started the year. However, the tone at the end of this period has become notably sombre as markets wake up with from a stimulus-fuelled period.


The Covid conundrum

Unfortunately, many regions are facing a ‘second wave’ of infections. Confirmed global cases rose well above 30 million and global deaths sadly passed the one million mark. Markets have had to digest balancing the risks of a resurgence of COVID-19 cases against vaccine optimism and support from governments and central banks. This helps explain an uptick in volatility in recent weeks.

Many countries have reintroduced lockdowns or restrictions of movement on their people. The rhetoric from world leaders is to avoid a repeat of lockdown measures taken in March. However, any restriction on the movement or activity of a population will have consequences for the wider economy.

US labour market data released through the period has been broadly improving and consumer confidence experienced its biggest increase since late 2011. However, the US reported record numbers of COVID-19 infections. Despite this, US equity markets managed to set record all-time highs as the strong upward momentum of technology shares continued to push higher. This marked the fastest-ever return to a record high after a drop of more than 20%. 

However, this coincided with a second wave of concerns, election uncertainty, and stretched valuation worries leading to equities selling off in the first two weeks of September. We have since seen evidence of daily cases becoming more stable and further confirmation from the Federal Reserve that it is willing to support the market has also helped calm volatility.


Political actions in focus

The US election is likely to create an increase in volatility. Our investment managers recognise this as a source of risk and opportunity, but do not position portfolios to perform on a certain election result.

The UK has struggled against the same macro themes shared with regions across the world as well as a broadly deteriorating Brexit situation. At the time of writing, it seems little progress has been made on negotiations as the clock continues to run down.

US and European trade tensions rose up the agenda. The US government announced it was looking at instituting new tariffs on $3.1bn worth of goods from the UK, Spain, France and Germany. With such actions, it is potentially gearing up for a future showdown with the European Union.

Tensions also continued between China and both the US and the UK. The US ordered the closure of the Chinese consulate in Houston due to claims of ‘stealing of intellectual property’.

The UK suspended the extradition treaty with Hong Kong. China imposed its national-security law in Hong Kong. This aims to subdue anti-government and pro-democracy protests that have been swelling for the past year. The move did no favours for existing tensions with the US.

Despite this, China’s rebound from COVID-19 showed signs of accelerating further. Consumer spending rose for the first time this year and there was a larger-than-forecast expansion in industrial production as restrictions were eased. The region also reported its largest jump in exports in 18 months. Investors also enjoyed digesting the reading on the Chinese services sector, showing it grew at the fastest rate in more than a decade. The Chinese Central Bank added 700bn Yuan (c. £76bn) to its medium-term lending facility in order to help liquidity, which further boosted sentiment.

Long-serving Japanese Prime Minister, Shinzo Abe, resigned due to ill-health. He was succeeded by Yoshihide Suga, Chief Cabinet Secretary throughout Abe’s tenure. The move was widely anticipated and caused no material reaction in markets. Suga’s appointment is expected to lead to a monetary and fiscal stimulus and economic reforms. Japanese equites have been one of the strongest performing through the quarter. So far, Japan’s ability to control the spread of the virus has been more successful than most western countries. Huge government stimulus and improving trade relations with other nations have also helped equity performance during the period.


European and UK initiatives

UK business activity grew at its fastest pace in five years, but employment figures released by the Office for National Statistics showed redundancies continued to rise. It’s worth noting that the level remains well below that seen during the 2008 downturn however, it’s clear that COVID-19 is still having a big impact on the world of work.

UK inflation plunged in August, caused mainly by the Government’s Eat Out to Help Out scheme and VAT cut in the hospitality sector. Annual consumer price inflation fell to 0.2% from 1%, but this was still above many economists’ predictions, who were expecting inflation to come in at zero.

The Bank of England left both interest rates and its bond-buying target unchanged and said it was ready to take further action amid economic uncertainty.

In Europe, Central Bank support continued, and current policy was confirmed as unchanged. EU leaders agreed the terms of a €750bn pandemic recovery fund, although the first support is unlikely to be available until late 2020, or even early 2021. However, this helped to support the market and it came around the same time as the Eurozone experienced its fastest rate of business activity growth in more than two years. But as the quarter went on, data indicated that while growth still remained positive, the speed of recovery had slowed. 


Oil prices

By the end of the quarter, oil prices had declined to their lowest level since June as the recovery in fuel demand stalled. Additionally, Saudi Arabia cut prices more than expected. Planned supply increases by The Organization of the Petroleum Exporting Countries weighed further on prices.


In summary

Our investment partners welcome any positive economic data that signals a sustained recovery but we all agree we have a long path ahead. Without meaningful improvement in virus control, investment managers have to be cautious and carefully manage risk.  Any optimism must be balanced against escalating US-China risk, political uncertainty and negative economic impacts brought by movement restrictions.