MARKET COMMENTARY – SEPTEMBER 2020

In spite of hopes that the COVID-19 pandemic would recede significantly during the hotter summer months in the northern hemisphere the virus continued its spread around the world with over 25 million cases globally by the end of August, up from 10 million at the start of July.  The number of new daily cases in the hard hit US has started to decline, although some regions including Europe are facing rising rates once again.  Vigorous testing and tracing regimes have allowed targeted measures such as travel restrictions and the requirement to wear a face mask in public to be introduced instead of national lockdowns, avoiding the full extent of the economic impact of the strict restrictions earlier in the year.

The easing of these measures saw economic data improve substantially pointing to continued global growth over the third quarter albeit at a more moderate pace than in May or June.  The challenging environment has failed to dent investor’s enthusiasm which seems to have been boosted by strong second quarter earnings in the US, with 84% of companies beating expectations and optimism over a viable COVID-19 vaccine appearing in the coming months.  This saw the majority of equity markets rise during August, again fuelled by the US technology sector.

Governments and central banks continue to provide very substantial levels of support for national economies, businesses and workers.  In the US negotiations over a further round of relief have stalled in Congress, a deal is expected but without further fiscal stimulus or a vaccine, unemployment is likely to become a persistent problem.  Nevertheless there has been substantial evidence of solid economic recovery in the US with manufacturing and the housing market expanding significantly ahead of expectations.

An important change to US monetary policy was announced in August which means that the Federal Reserve will shift to average inflation targeting, suggesting that monetary policy will remain supportive for the foreseeable future even if this means some uptick in inflation rates.

In Europe, COVID-19 cases increased to levels close to that seen at the height of the crisis however mortality rates remain much lower and local targeted measures have helped to avoid significant damage to economic activity.  Social security safety nets continue to prevent major job losses allowing consumer confidence to recover, industrial production also rebounded strongly but remains below pre-crisis levels.  The important car manufacturing sector has been boosted by an increase in new registrations.  European markets continued to benefit more broadly from the European Council’s agreement to establish a €750bn European Union recovery fund and the stability this should bring.

The UK has managed to keep new cases of COVID-19 relatively low and well below the World Health Organisation’s recommended limit for reopening economic activity.  Targeted schemes such as the Government’s ‘Eat Out to Help Out’ incentive have helped boost the hospitality sector although for a limited time.  The housing market has been surprisingly strong and consumption has recovered with retail sales above pre-pandemic levels.  This contributed to an economic rebound which was starting in May and June, although after a 20.40% quarter on quarter decline in GDP for the second quarter, output will be well below its pre-crisis levels for some time.  Although unemployment has remained low, with over 3 million workers still believed to be furloughed, the unemployment rate could rise considerably with the scheme set to end in October and the Government so far ruling out an extension.

Concerns over this cut off together with stalling Brexit negotiations have impacted investors’ appetite for UK assets, the FTSE All-Share still gained in August but lagged the extent of recovery seen in most other regions.

Emerging markets in Asia remain affected by the pandemic to varying degrees, India, Indonesia, the Philippines and South Korea seeing higher instances of new cases whereas Latin American while suffering a high level of cases has seen the pace slow.  China appears to have suppressed the virus effectively aiding continued economic recovery albeit at a slightly slower pace with consumers yet to fully recover confidence, perhaps due to less generous levels of government support.

The speed and scale of the response from central banks and governments has managed to cushion the economic shock created by the pandemic and lift markets around the world.  The increase in COVID-19 cases in Europe and other countries is a reminder that the disruptive capacity of the virus is still with us and this is likely to remain the case until a vaccine is widely available, this means that economies will be constrained to some extent by measures slowing the spread and governments being required to support consumer incomes and businesses for longer than anticipated or than budgets may allow without longer term implications.

Economic recovery has been strong thus far but the considerable degree of uncertainty around the outlook for the virus suggests that for most investors maintaining a balanced and diversified portfolio remains important, with an emphasis on quality for both bond and equity holdings.  With government bond yields at historically low levels the inclusion of alternative assets such as infrastructure and gold also remain justified.

Performance to 2 September 2020

*August 2020