Equity markets finished in negative territory for the week of 31 August, with the exception of Japan, as technology and growth stocks sold off.
Meanwhile, news of the coronavirus pandemic continues to hit headlines. India is now seen as the global epicentre of the virus as new cases topped 80,000 on 30 August1.
Russia became the fourth country – joining the US, India and Brazil – to report over a million cumulative cases1, while the early-stage trials of its controversial new vaccine received its first peer-review that detailed it generated strong immune responses in 100% of the participants without any “serious adverse effects”2.
In the US, concern1 has shifted to states that were less affected in the first and second waves – such as Iowa and the Dakotas – which have seen sharp rises over the past two weeks. However, government officials in all 50 US states have been told that they should be ready to distribute a vaccine by 1 November3 to healthcare workers and at-risk individuals, including the elderly. Meanwhile, although Congress and White House officials warned on Tuesday 1 September that the two were still poles apart on agreeing to more economic stimulus2, reports are now surfacing that suggest Senate Republicans are preparing a US$500 billion relief package that could be voted on this week.
The US stock market falls came despite the latest US jobs report showing that US employers added 1.4 million jobs in August4, sending the unemployment rate down to 8.4% from 10.2%. The other main release was for the purchasing managers’ indexes (PMI), with the US ISM non-manufacturing number coming in at 56.9 and manufacturing published at 53.1 i.e. both above the magic 50 mark that depicts expansion.
COVID-19 cases on the continent continue to remain elevated, with Spain seeing more confirmed cases on a weekly basis than it did during its original outbreak. Meanwhile, the Euro bloc published flash consumer price index (CPI) readings5, which showed core CPI falling to 0.4%, the lowest level since the formation of the single currency in 1999. PMIs were also published for the Euro area, by Markit Research, with the composite revised up to 51.9.
On the trade front, tensions between the US and China escalated again last week after the US State Department stated that Chinese diplomats in the US will now face new limits on travel and meetings. It’s thought that the move is aimed at matching China’s restrictions on American diplomats.
Last, but not least on the Brexit front, Michel Barnier flagged that he was disappointed with the progress of the negotiations2 given the EU believes that the UK has not shown any desire to seek a compromise in the last two areas for an agreement, i.e. fisheries and fair competition. Negotiations are also unlikely to progress following reports over the weekend suggesting Tory ministers are planning new legislation that would overwrite key parts of the Brexit withdrawal agreement2 through the elimination of a new customs arrangement in Northern Ireland. And Boris Johnson put forward a five-week deadline to conclude talks, stating the UK will walk away from negotiations if an agreement isn’t reached by 15 October.
In terms of market movements, looking back over the month of August, the month proved to be a very strong one for risk assets with world equities up around 7% in US Dollar terms and 5% is Sterling terms, given the weakness in the US Dollar.
Growth stocks (5.88%) easily outperformed value (3.19%) – a continuation of the year’s pattern where the gap between growth and value is now a staggering 30% year-to-date.
Unsurprisingly, in such an environment, it was sectors such as consumer discretionary and IT which were the strongest areas in August. The more defensive sectors, such as utilities, healthcare and consumer staples lagged the broader market.
Meanwhile, large capitalisation stocks (4.92%) outperformed their small peers (4.14%) across August, while the week of 31 August saw both groups fall back (-0.79% and -0.80% respectively).
Regionally, emerging markets equities (2.29%) underperformed developed markets (4.90%), despite the weaker US Dollar – a scenario that tends to be supportive of emerging market assets.
Within bonds, the risk-on environment meant high yield was the best performing area in August. Government bonds generated a negative return and yields moved higher as investors moved out of safe haven assets.
There was also a significant move higher in longer dated government bonds towards the end of August as the Federal Reserve (Fed) announced a shift in policy to targeting average inflation. This move essentially means that the Fed will allow inflation to exceed a 2% inflation target without raising interest rates. We believe this shift in policy by the Fed could translate into further US Dollar weakness, a steeper yield curve (which means higher yields at longer maturities) and increasing demand for real assets.
However, the first week of September saw a sharp sell-off in higher valued growth and tech stocks, i.e., a reversal to August’s markets. This risk-off reaction saw defensive equity equities outperforming more cyclical areas. And higher quality government bonds and investment grade credit outperformed high yield debt.
August was a good month for our portfolios. This was especially true at the lower risk end of the spectrum with the balanced and income strategies outperforming, mainly as a result of our underweight to fixed income and our positioning within bonds. Our bias towards short duration relative to market and our exposure to short-dated high yield was a tailwind for returns, as credit spreads tightened and government bond yields rose.
Our equity exposure also generated a good return in August. However, our more defensive bias meant overall our equity portfolio lagged slightly throughout the month. Last week saw a slight outperformance given we are slightly underweight two of the three of the sectors most negatively impacted, which were IT and consumer discretionary sector, and neutral in communication services.
In terms of property, our exposure to global REITs meant performance lagged due to rising government bonds yields. This was offset, however, by our exposure to UK commercial property through our investment in BMO Commercial Property Trust, where the share price rebounded. This followed the reinstatement of its monthly dividend, albeit at 50% of the level pre-COVID-19, which they feel is a prudent approach given the continued uncertainty due to the pandemic.
Our alternatives positions also were generally positive, with the exception of Greencoat UK Wind and the KKV Secured Loan Fund. For KKV, its shares continue to trade at a substantial discount, but we believe that an orderly wind down, where assets are realised at or close to NAV, gives us more attractive exit options than selling in the secondary market.
Central banks move back into the spotlight as the European Central Bank announces its latest monetary policy decision, with the usual press conference with Christine Lagarde to follow. It will be interesting to see how the bank responds to last week’s low CPI reading and the continued threat from coronavirus in Europe.
For economic data publications, the main highlight should come from the US on Friday with its August CPI reading.
It is likely that Brexit will surely remain in the headlines too as the latest round of negotiations between the EU and UK takes place.
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Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how their portfolios are responding to market events, or call +44 (0)1624 645000 to speak to our client services team.
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Sources: Nedbank Private Wealth and (1) John Hopkins University; (2) Bloomberg; (3) US Centers for Disease Control and Prevention; (4) US Department of Labor; and (5) Eurostat.
Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
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