The week of 19 October was unusual in that both riskier and safe haven asset classes came under pressure. Meanwhile, the coronavirus pandemic and political uncertainty, including the US election and Brexit, remain the main factors influencing financial markets.
With regard to COVID-19, the situation continued to deteriorate in Europe, with numerous countries, including the UK, Italy and France, announcing record increases in case numbers. In the US, daily cases also continued rising, reaching a record level of 85,000 over the weekend¹. The number of sick being hospitalised also rose back to levels last seen in late summer².
However, there was more positive news on the vaccine front, as AstraZeneca/Oxford University’s vaccine candidate was deemed to have produced a robust immune response in elderly people². Meanwhile, Johnson & Johnson announced in a presentation at the World Health Summit that first batches of its vaccine could be available for emergency use as soon as January 2021¹.
In the US, the senators departed the Capitol for a pre-election break on Monday 26 October, making the chances of passing a fiscal stimulus package before the election practically impossible. Their departure, after the confirmation vote for Amy Coney Barrett to join the Supreme Court, left House Speaker, Nancy Pelosi, and Treasury Secretary, Steven Mnuchin, to continue haggling over the details of the package. The Trump administration is holding out for US$1.9 trillion in stimulus and the Democrats for US$2.4 trillion¹.
Staying with the US, the final presidential debate took place on Thursday 22 October and was far more orderly than the first. Early indications are that both candidates held their own, which was good news for Joe Biden who came into the night leading by high single digits in national polling averages. Despite this margin, reports suggesting that Iran and Russia are attempting to interfere with the presidential election¹ will only serve to intensify concerns that the result might be disputed if Biden’s victory is not convincing enough.
In terms of economic data, the US services and manufacturing purchasing managers’ indexes (PMIs) were both above the 50 mark, which separates expansion from contraction⁴. And while the US weekly initial jobless claims⁵ came in lower than expected at 787,000, and the lowest number since the start of the pandemic, it is still far higher than the highest number recorded during the 2008 global financial crisis.
Elsewhere, the Eurozone flash manufacturing PMIs were stronger than anticipated, coming in at 54.4. However, the services PMIs were below expectations at 46.2, as recent restrictions held back activity in this vital sector⁴.
The UK’s consumer price index showed inflation rose to 0.5% in September. While it marked an increase from 0.2%, which will be welcomed, it remains significantly below the Bank of England’s (BoE) 2% inflation target. As such, BoE Deputy Governor Ramsden also said last week that there was “considerable headroom” for more quantitative easing¹.
On the Brexit front, the UK government suffered a defeat in the House of Lords on its controversial Internal Market Bill after a regret motion was passed on Tuesday 20 October³, suggesting there is almost no chance of the bill getting through its remaining stages in the Lords without significant changes. Meanwhile, Sterling had a fairly strong week, with the UK agreeing to restart Brexit talks with the EU after Michel Barnier acknowledged, on Wednesday 21 October, that both sides would need to compromise to reach an agreement².
Over the four days to Thursday 22 October, the MSCI All Country World Index was down -1.85% in Sterling terms, and -0.54% as measured in slightly weaker US Dollar terms. Emerging Markets (-0.2%) and Asia (-0.5%) outperformed developed markets as the US (-2.24%), Europe (-2.38%) and the UK (-2.17%) all underperformed slightly. This is probably because developed markets seem to be the epicentres of the three main uncertainties right now – COVID-19, the US election and Brexit.
Unusually in 2020, within equities, value stocks (-1.27%) performed better than their growth peers (-2.33%). It was interesting to see that the best performing sector was financials
(-0.17%), while the worst performer was information technology (-3.07%), which year-to-date has been the best performing sector. This turnaround was probably the result of some banks reporting Q3 earnings numbers that were better than expected.
Meanwhile, government bonds were under pressure, particularly US treasuries. This reflected investors’ concerns that a clean sweep for the Democrats – where Biden wins the presidency, control of the House of Representatives is retained and they win a majority in the Senate – would see US politics swing much more to the left than if one of the three power bases remained in Republican hands, which would have implications for future stock market movements.
In terms of absolute returns, our growth strategy posted the strongest returns over both periods, while our income strategy provided the lowest returns, which were pretty much flat.
Within equities, the improved performance of value stocks over growth, for once, showed up within our portfolios through the outperformance of Dodge and Cox, which has a strong value bias. The improved performance of emerging markets over western developed markets was also helpful for us, as we have a reasonable position in emerging markets. Overall, when we take all our equity funds together, as a group, they were in fairly decent shape last week and over the month to date, with TT Emerging Markets Equity and Nedgroup Global Equity also making a positive contribution.
The pressure on government bonds, particularly US Treasuries, was a slight drag on performance, with our bias towards US bonds in portfolios, although our credit positions were helpful as we saw in both investment grade and high yield.
Alternatives and were a mixed bag, although, on the whole, these investments performed much better than equities over the week.
Here, BMO Commercial Property Trust (BCPT) and GCP Asset Backed Income both reported results that were in line with expectations, if not slightly better. This was despite BCPT reporting a modest decline in its net asset value, mostly as a result of its retail exposures, given rental collections have been good, with more than 80% paid on time.
Finally, a few broader thoughts as we head into the last couple of months of the year. Who would have thought in January, when we were starting to read reports about a mystery illness in China, that Asia would by now be the best performing region, outperforming the UK by 33%? Could anyone have predicted that the growth style of investing would outpace the value style by an equally impressive 33%? Or would anyone have thought that US treasury bonds would be one of the best performing assets? It really has been a strange year of extremes.
There is a busy calendar of events for markets for the week of 26 October. This is in addition to the likelihood that the coronavirus pandemic will continue to dominate attention as case numbers rise in Europe and the US, and governments move to impose restrictions.
As the last full week of campaigning before US Election Day, the focus will also be on US politics this week. In an early victory for President Trump, the US Senate confirmed Judge Amy Coney Barrett to the Supreme Court on Monday 26 October. Her appointment seals a 6-3 conservative majority on the top US judicial body⁶.
In terms of economic data, we’ll get the first look at the Q3 gross domestic product (GDP) readings from a number of countries, including the US, the Eurozone, Germany, France and Italy.
Attention will also turn back to central banks, with both the European Central Bank and the Bank of Japan announcing their latest monetary policy decisions.
And finally, it’s a big week in terms of earnings releases, with 184 of the S&P 500 companies making announcements.
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Sources: Nedbank Private Wealth and (1) Bloomberg; (2) Financial Times; (3) The Times; (4) Markit Economics; (5) US Department of Labor Statistics and (6) BBC News.
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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