Equity markets moved sideways during the week of 12 October, while government bonds outperformed corporate bonds, particularly high yield credit. Markets, meanwhile, continue to react to a real mix of factors including everything linked to the coronavirus pandemic (such as new cases, vaccine trials and related government restrictions); the mixed economic data and earnings results; as well as political uncertainty, which includes the US election, updates on government support for economies, and Brexit.
With regard to COVID-19, the situation continued to deteriorate in Europe1, with the UK the latest to announce a new three-tier system of restrictions to help combat the virus, the Netherlands also imposing a partial lockdown, and France considering yet more restrictions as its intensive care numbers continue to rise. In the US, new cases now average over 48,000 per day – the highest level since mid-August.
This contrasts with any light at the end of the tunnel with regard to the pandemic. In the UK, it was reported2 that the National Health Service is in talks with groups, including the British Medical Association, about mobilising for a potential rollout of a COVID-19 vaccine by December. The report added that there is around a 50/50 chance that the vaccine can begin to be administered that month. Meanwhile, Pfizer is expected to apply for emergency approval of its vaccine in late November in the US, assuming it receives positive results from its current trial, while Moderna is also expecting its vaccine trial results publication in November, which could pave the way for the US government to give it an emergency use nod in December3.
However, the US response to the pandemic continues to confuse investors – not least as a decision on a new stimulus package has yet to be agreed. It was reported1 that the House Speaker, Nancy Pelosi, and Secretary of the Treasury, Steven Mnuchin, continue to discuss potential deals. However, it remains doubtful that the Republican Senate will accept any deal struck
The lack of political consensus is only exacerbated by Trump facing a noticeable polling deficit in the final weeks before election day4, while there are increasing rumours that the Democrats could flip the senate. Deutsche Bank has reported that if the polls remain steady, it would take the largest polling error since World War II (when data began to be recorded) for President Trump to win the popular vote.
This lack of a stimulus package, however, highlights concerns that the US recovery is still not as entrenched as it might be, as US initial jobless claims came in at 898,0005, well above expectations at a seven-week high. With earnings seasons having started, the market will also begin to understand the impact of the economy on company performance. As such, while JPMorgan Chase (JPM) and Citigroup both reported better-than-expected trading revenue and beat earnings per share expectations, the levels of credit reserves were larger than expected, e.g. JPM’s reserve for credit losses was still almost US$34 billion, given the bank expects loan defaults to surge in the first half of 2021.
In other economic news, the US released its September consumer price index5, which showed a month-on-month increase of +0.2%, which was in line with expectations, and a year-on-year (expected) figure of +1.4%.
Over in China, economic data releases showed that Q3 gross domestic product came in at 4.9% higher than last year1 as the country appears to have kept the virus at bay since the initial outbreak.
In the UK, Boris Johnson’s 15 October Brexit deadline came and went, with reports suggesting that the UK and EU will continue negotiations with the aim of making progress on a deal by the end of October/early November1. Boris Johnson did, however, announce that the UK should now prepare for a no-deal outcome unless there is a fundamental change in the EU’s approach.
Finally in the International Monetary Fund’s (IMF) latest World Economic Outlook, its global growth projection for 2020 was reduced to a -4.4% contraction from the -4.9% announced in June.
With markets remaining largely unchanged, the difference in performance between the MSCI All Country World Index in US Dollar terms (-0.25%) and in Sterling terms (+0.49%) was due to the weakness in the Pound. This in turn can be attributed to Brexit uncertainty and the recent introduction of even tougher COVID-19 restrictions across the UK.
Within equities, growth stocks (+0.90%) outperformed value (+0.02%), driven higher by information technology (+1.26%) and communication services (+1.33%) stocks, which are essentially the sectors that benefit the most from people working from home.
Meanwhile, concerns around the impact of more restrictions on economies meant it was the more cyclical sectors that lagged the most last week. The worst hit sectors were energy (-2.10%), real estate (-1.32%), and materials (-0.30%). Healthcare stocks were also weak (-0.18%), although these have underperformed more recently as markets increasingly focus on the US election. A big win for Biden and the Democrats could see healthcare reform on the agenda, including downward pressure on drug prices.
In terms of regional performance, UK (-1.64%) and European (-0.59%) stock markets were among the weakest reflecting not only their higher exposure to more cyclical stocks such as financials (-0.23%), but also reflecting the rising number of COVID-19 cases in these regions.
Within bonds, the weak performance of equity markets meant government bonds outperformed corporate bonds. European government bonds generated the highest returns, as concerns over low inflation, economic weakness and the expectation of further quantitative easing from the bloc weighed on already low yields.
Performance continues to suffer slightly due to our overweight in property, the performance of our alternative investment trusts, and our underweight to European government bonds.
Within equities, our exposure to energy and financials was counterbalanced by our exposure to information technology stocks.
Within bonds, our investment grade corporate bonds and US government bond holdings were the most beneficial for returns as yields fell last week, while our lack of negative yielding European government bonds was detrimental.
In terms of property, our global and UK exposure was adversely impacted by increasing COVID-19 restrictions. While the increasing cases had a negative impact on investor sentiment for our UK care home investments.
Our holding in GCP Asset Backed Income resulted in positive news as the team announced that the net asset value of shares had increased over the quarter to stand at 101.29p as of 30 September 2020, up 0.46p in Q3 after the payment of dividends. The fund’s investments continued to perform well in Q3, with all principal and interest payments received as expected. While the shares are trading on a 15% discount, we believe this is due to events in other parts of the asset-backed sector and the shares remain attractive, especially given the dividend yield of over 7%.
Last, but not least, Hipgnosis announced the acquisition of a catalogue by Grammy Award-winning songwriter L.A. Reid. His work includes songs by Whitney Houston and Michael Jackson. L.A. Reid is also set to join its advisory board bringing to the table significant music industry experience, having developed the careers of Usher, Mariah Carey, Kanye West, Jennifer Lopez and Rihanna.
It’s a busy weekly calendar given the number of economic publications, and as the coronavirus pandemic continues to dominate the news flow.
Attention remains fixed on the US election, with a key highlight being the final presidential debate on Thursday 22 October.
Brexit is also likely to dominate the headlines this week, particularly as the House of Lords begins debating the government’s Internal Market Bill.
In terms of economic data, October’s initial or ‘flash’ purchasing managers’ indexes from around the world are due on Friday 23 October. The numbers for Europe will be of particular interest given the resurgence of the virus in recent weeks and what the effect on economic activity will be.
The IMF is holding a number of panel discussions this week that sees Federal Reserve (Fed) Chair, Jay Powell, European Central Bank President, Christine Lagarde, and Bank of England Governor, Andrew Bailey, all speaking. And the Fed will release its beige book to offer an insight into current economic conditions in the US.
Finally, earnings season gets into full swing as 90 of the S&P 500 companies make announcements.
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Sources: Nedbank Private Wealth and (1) Bloomberg; (2) Reuters; (3) Wall Street Journal; (4) RealClearPolitics; and (5) US Department of Labor Statistics.
The value of investments can fall, as well as rise, and you might not get back the original amount invested. Exchange rate changes affect the value of investments. Past performance is not necessarily a guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios and is referenced for illustrative purposes only, not as a recommendation, not least as it may not be suitable. You should always seek professional advice before making any investment decisions.
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