Global markets have reflected the delicate balance between the re-opening of the economy and containing the spread of coronavirus in the third quarter of 2020. In July and August, markets registered some impressive gains as governments pushed ahead with encouraging life to return to normal; in the UK, the government encouraged individuals to ‘eat out to help out’, to return to work and claim £50 towards a bicycle service.
Second Wave of Coronavirus
More recently, September has seen a resurgence of covid-19 in many parts of the world with the disease spreading again rapidly, total cases now well over 30 million and around 1 million deaths, of which about a fifth have been in the US. In the UK and elsewhere students returning for the new academic year and keen to socialise have caused authorities a particular challenge.
Markets have consequently retreated and given up some of their gains as lockdowns have been re-applied and concerns have re-emerged about the economic impact of tighter restrictions.
Over the quarter though, other than the UK, most regions of the world have nevertheless registered a positive performance. China has led the way with a gain of +5%, US and Asia +4%; global markets as measured by MSCI World is +4%. It is also good to consider that despite the seriousness of covid-19 and its impact on almost everybody in the world, global markets as a whole have registered a positive performance since January 2020.
US Elections Loom Large
Global politics have added an extra dimension too. The US presidential election in November is looming large. The prospect of a Biden victory is a potential worry for markets as he is seen as less business-friendly than Trump. In addition, Trump has indicated that he may not accept defeat if he loses, which raises the spectre of a constitutional crisis in the world’s leading democracy.
Many states in the US have either loosened restrictions too soon or not managed to bring the spread of covid-19 under control. This contrasts with many other countries in the developed world. The failure in the US to manage the coronavirus crisis effectively, as well as the Federal Reserve’s new looser approach with a focus on employment and willingness to see inflation rise, has resulted in a fall in the US dollar over the quarter. Indeed, the new head of the European Central Bank, Christine Lagarde, is aware that one of her biggest challenges is dealing with what some critics of the US have dubbed ‘beggar-thy-neighbour dollar devaluation policy’. It reminds us of how Alan Greenspan pushed the dollar down in 2004/5 following comments by Jean-Claude Trichet.
It is notable though, that as the global reserve currency, the US dollar has regained some ground recently as the second wave of coronavirus has impacted many parts of the world.
US Technology Companies Stand Out
Much has been said about the importance of the top five US technology companies (Apple, Amazon, Microsoft, Google, Facebook) and how their impressive gains this year have both driven the US market and now their sheer size should make investors nervous. Academic research suggests that since 1926, the best-performing 4% of listed companies have driven the net gain of the entire US stock market. It makes sense that in any market, there will be ‘stand-out’ winners which will benefit disproportionately. This is particularly true with these five companies which are at the centre of the digitalisation of our lives; they have huge amounts of cash on their balance sheets enabling them to buy back large numbers of shares and they have impressive profit margins and can acquire smaller competitors almost at will. Their biggest threat is almost certainly political with the prospect of anti-trust legislation and digital taxes on the near horizon. However, there are many small and medium size technology companies with exciting growth prospects which are likely increasingly to attract investors’ attention.
China is a potential beneficiary of the US elections as Trump is focused on domestic matters, so there has been some temporary thawing at least in US-China trade tensions.
UK Brexit Trade Challenges and Covid-19 Resurgence
Brexit trade negotiations continue to make headlines and to date the UK and EU appear unable to reach an agreement. Most worrying for investors, the powers contained in the UK government’s Internal Markets Bill, if used, would breach international law, which would undermine the UK’s reputation as a trustworthy trading partner. Together with a significant second wave of coronavirus, this has led to a fall in sterling and decline in the UK stock market during September. Indeed, the UK stock market has continued to underperform, with the FTSE-100 declining 4% over the last three months and 20% year-to-date. The more domestically FTSE-250 remains down by 25% since January.
Rishi Sunak, Chancellor of the Exchequer has recently announced that whilst the furlough scheme will end, a new Job Support Scheme will aim to avoid mass unemployment over the coming months, whilst ensuring that unviable companies and jobs are not supported. The new scheme, however, will place greater emphasis on employers, so it remains to be seen how effective it will be at preserving jobs. Interestingly, the Autumn Statement has been cancelled on the basis the government does not consider it appropriate to set out long-term plans at this stage.
The Bank of England is maintaining interest rates at just 0.1% to help stimulate growth. The new governor, Andrew Bailey, has at least for now ruled out the possibility of negative interest rates in the UK.
EU Economic Stimulus and Recovery Prospects
Continental European investments were the beneficiary of a historic agreement amongst EU leaders, which resulted in a €750bn covid-19 Recovery Plan. This tremendous stimulus package helped to boost the euro too. However, many European countries are also experiencing significant second waves of coronavirus, which is testing social cohesion in communities, particularly in parts of France and Spain. The European Central Bank also has the challenge of keeping the euro down, as excessive appreciation would dent the prospects for exporters and act as a significant headwind for economic recovery. It is encouraging though that recent business confidence surveys in Germany have been positive and indicate grounds for optimism.
With regard to the outlook, economic data is difficult to predict since much will depend on the path of covid-19 and the success of governments around the world to bring it under control. Whilst a vaccine is being touted as the silver bullet, or the cavalry over the hill, in reality it is likely that we need to learn to live with the disease for the foreseeable future.
Economic Recovery Expected
Most importantly though, the general trend towards economic recovery remains broadly intact. At the start of the summer, the re-opening of the economy and the release of pent-up demand after national lockdowns saw some very impressive short-term growth numbers from a low base. Adjusting for this, the most recent data is nuanced. Of course, in certain sectors, progress is muted and has halted again as consumers take stock of the second wave of the virus and cancel or postpone holidays or other discretionary expenditure. However, ecommerce and the move to a digital world is creating significant opportunities for companies in diverse sectors of the economy as the world adapts to the new normal.
Just as with every crisis throughout history, we will emerge from coronavirus. Indeed, the IMF has forecast global growth of +5.4% for 2021, with further recovery in the years after. Of course, much will need to be done to secure supply chains and ensure that productivity is maintained, but these challenges will present opportunities for business and accelerate the pace of change as technology embeds itself into almost every area of our lives.
Equities – TINA and FOMO
In summary, whilst volatility has to be expected over the autumn and winter as tensions emerge between economics and public health, all against a backdrop of the US elections and Brexit trade negotiations, the continuing low interest rate environment favours equities over asset classes. The US Federal Reserve has recently signalled that it expects to keep rates at rock-bottom until at least the end of 2023.
Indeed, with no sign of significant inflation in the foreseeable future, $16tn sovereign and investment grade bonds now on negative yields, it is difficult to make the case for high-grade bonds. This should continue to support the momentum which equities have enjoyed since April as a result of the fear-of-missing-out (‘FOMO’). Many commentators have talked of equities as the only option for growth for investors with yet another acronym, ‘TINA’ (there is no alternative).
Focus is Overseas Investments in Growth Companies
Targeting investments in companies with strong balance sheets and robust business models operating in growth sectors of the economy should reward investors as the global economic recovery gains traction going into next year. We continue to prefer overseas markets to the UK at this stage (notably, selectively US, continental Europe, especially Germany, China, Japan and other northern Asian markets), particularly with the potential for further sterling weakness; in any case, at least until the Brexit trade uncertainty is resolved, at which point valuations may throw up some interesting opportunities in the UK. Only when the economic recovery is assured and coronavirus under control are we likely to re-focus on more economically sensitive and cyclical companies and look beyond developed markets.
Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500, info@clients@SeabrookClark.co.uk