Market update – October 2020

Volatility rises as pandemic lingers

Europe is facing a “second wave” of coronavirus with many countries reporting the highest case numbers since spring. Governments have re-introduced restrictions to limit the spread of the virus. Thankfully, fatalities have not risen at the same pace, due to better treatments and the concentration of new cases amongst the young. However, the realisation that economic activity will not be returning to “business as usual” any time soon has started to impact stock markets. After a strong summer, global equities have become more volatile in recent weeks. Even the technology sector, which has been seen as a safe haven amid the pandemic, has been under pressure.

US politics remains a risk

The lack of progress on further fiscal stimulus in the US may also be a source of concern for investors. Talks between lawmakers continue, but agreement remains elusive. If Congress fails to agree on another support package, US consumer spending may not be sustained at current levels. The upcoming election is another source of uncertainty. Markets may well be sanguine about a clear result for either candidate with the Democrats and Republicans each controlling one chamber of Congress. This combination would likely result in relatively limited policy change. Other outcomes, including a delayed or contested result, could be more of a shock for markets.  

European policy makers focused on recovery

In the UK, Rishi Sunak took the unusual step of cancelling a Budget. This suggests immediate changes to the tax regime are unlikely, as the government focuses on supporting the economy. One immediate challenge will be the end of the furlough scheme later this month. A new job support plan will help cushion the blow – but it is less generous than the furlough scheme and unlikely to prevent a rise in unemployment. The rising odds of a “no trade deal” Brexit also increase the risks to the UK economy.

European central banks remain keen to support the recovery. The Bank of England continues to discuss negative interest rates, without giving a clear indication of its intentions. The ambiguity may be deliberate; the possibility of negative rates helps keep borrowing costs very low, while the BoE avoids the operational and political challenges of actually implementing the policy.  Meanwhile, Christine Lagarde has said that the ECB will consider the benefits of the Federal Reserve’s new average inflation target as part of is own strategy review, which is due to conclude next year.

Portfolio positioning

Gradual economic recovery, combined with support from central banks, should continue to support global equity markets. However, we are mindful of the risk of renewed volatility. 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 at the end of September, the FTSE100 was down 22% this year, compared to a rise of 4% for the S&P500. We also maintain our allocation to gold in many multi-asset portfolios. The precious metal has pulled back slightly in recent weeks but we believe it continues to offer valuable defensive and diversifying properties.