Market update – September 2020

Global equities continue to rise

As schools and some offices re-open over the coming weeks, it finally feels as if a sense of normal is returning. Investors have also been encouraged by hopes that the worst of the pandemic is behind us, as well as signs of economic recovery. Global equities enjoyed their strongest August performance in more than 30 years, rising over 6% in the month. The S&P500 is now above its pre-Covid peak. However, beneath the surface, the aftershocks of the pandemic are clear to see. Performance has been led by US technology giants, which have benefited from recent changes to the way we live and work. Other sectors and markets – including the FTSE100 – remain well below where they started the year. Bond yields also remain very depressed, though they have risen from their lows in recent weeks.  

Federal Reserve signals new approach to inflation

At the annual Jackson Hole economic symposium (held virtually this year), Federal Reserve chairman Jerome Powell announced changes to the Fed’s monetary policy framework. In future, the US central bank will not necessarily look to raise rates when employment rises above its estimated maximum level. It will also aim to meet its 2% inflation target on average, allowing inflation to overshoot the target to make up for previous shortfalls. Anticipating the shift, investors have been pricing in higher inflation for several months now. This is likely one factor contributing to recent weakness in the dollar and US government bonds. The symposium also featured a speech from Bank of England governor Andrew Bailey, who reminded investors that the Bank would not let monetary conditions “tighten prematurely when there are some initial signs of an economic recovery.”

Governments grapple with exit from emergency measures

While central banks have signalled they will keep monetary policy as accommodative as possible, some of the fiscal support measures introduced in response to Covid-19 are soon set to expire. In the US, Congress has yet to agree on another stimulus package.  In the UK, employers must now contribute to the cost of  the furloughing staff, with the scheme due to end entirely in October. By contrast, most eurozone governments have extended their furlough schemes. The UK is also seeing increased focus on the question of how to pay for the coronavirus response, with the Treasury reportedly pushing for tax increases. Changes could be announced in November’s Budget.

Portfolio positioning

Signs of economic recovery, combined with support from central banks, should continue to act as a tailwind for global equity markets. However, we are mindful of the risk of renewed volatility, with Covid-19 and the US election two key sources of  uncertainty. Where appropriate, we continue to reduce our UK equity exposure and transition portfolios towards a more global approach. This has served us well in recent months as the UK continues to underperform other major markets. We also maintain our allocation to gold in many multi-asset portfolios. The precious metal continues to perform strongly and we believe it offers valuable defensive and diversifying properties.

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