IN FOCUS6-8 min read

The risks to the recovery

Global equities continued to rally in the third quarter, with the US – and in particular the technology sector – leading the way. But performance has become increasingly dependent on a relatively small number of stocks – and an election looms.



Caspar Rock
Chief Investment Officer

Equities rise as global economy starts to heal

Coronavirus took a heavy toll on the global economy, but the worst-case outcomes envisaged by economists and officials have thankfully been avoided. While this year’s contraction is the worst in decades, a strong rebound over the summer means that output is unlikely to have fallen by as much as initially feared. Schroders’ economists recently upgraded their forecast for 2020 to a fall in global GDP of 4.6%, compared with a fall of 5.3% previously. On this basis, output will exceed its 2019 level by the end of 2021. Corporate earnings are expected to follow a similar trajectory.

Investors were encouraged by these signs of economic recovery – as well as hopes that the worst of the pandemic is behind us. Global shares enjoyed their strongest August performance in over 30 years, rising more than 6% in the month. Despite a rough patch in September, the S&P 500 is still above its pre-Covid peak.

This leaves shares looking expensive on the basis of near-term earnings. The MSCI World Index trades at 24 times forecast profits over the next year, well above the long-term average of 15 times. This is not necessarily a cause for concern. Despite frequent criticism of markets’ short-termism, they can actually be quite efficient at “looking through” temporary disruption. Today’s high valuation suggests that investors are looking beyond the slump in earnings caused by the pandemic and focusing on companies’ longer-term earnings potential.

Contribution to world GDP growth



Forecasts should not be relied upon and are not guaranteed. Schroders Economics Unit, September 2020

Technology continues to shine

Beneath the surface, however, the after-effects of the pandemic are still apparent. For one thing, the stock market’s gains have been very unevenly distributed. Investors in the UK, Spanish or Italian stock markets, for instance, are still nursing significant losses year-to-date. To a striking degree, performance has been led by US technology firms, which have benefited from recent changes to the way we live and work. In fact, the biggest US tech companies are now worth more than entire European stock markets (see table below). The performance may be justifiable, at least to some extent. These companies were in strong shape before the pandemic hit – and are now benefiting from an unexpected acceleration in digital adoption that could lead to years of profit and cashflow growth. 

US tech...more valuable than major European stock markets

Company/Market  $bn market cap
Apple 2,247
UK (FTSE 100) 2,008
Amazon 1,769
Microsoft 1,750
France (CAC 40) 1,345
Germany (DAX 30) 1,215
Alphabet 1,172
Facebook 862
Berkshire Hathaway 521
Visa 454
Spain (IBEX 35) 435
Walmart 418
Tesla 417
Johnson & Johnson 399
Italy (FTSE MIB) 352

Source: Refinitiv Eikon, 3 September 2020

The strong performance of the tech sector is also a reflection of the long-running “style bias” that has characterised markets in recent years. In an uncertain economic environment, investors seek out those businesses that can offer some certainty of growth. There are signs this has been taken to extremes this year. Some companies have seen share prices rise far more than perhaps could be justified by the witnessed change in the fundamentals of their business.

There has also been a surge in retail participation in the stock market, especially in the US. Robinhood, an app which allows US retail investors to trade free of charge, saw account numbers rise by 30% in the first quarter of the year. Shares of Tesla have been a popular hunting ground for this new breed of day-traders. The electric carmaker has seen its share price rise four-fold this year, with daily traded volume averaging $30bn (£23bn) in August and September. The biggest UK companies, by contrast, generally see daily trading volumes of less than £0.5bn.

The recovery remains vulnerable

The key question mark is the course of the pandemic. As the spread has slowed in the US, Europe now looks to be embarking on a second wave. And while progress towards a vaccine continues apace, it is at best months away. In the meantime, consumers and businesses face the increasing likelihood of a resurgence of Covid-19 over the colder winter months and potentially further lockdowns. Understandably, people are in a cautious mood and there are signs that, after an initial burst of pent-up spending, activity may now be more subdued.

There is also uncertainty around fiscal support measures to follow on from those introduced earlier this year. At the time of writing, the US Congress has yet to agree on a further stimulus package. If it fails to do so, consumer income – and spending – may not be sustained at current levels. In the UK, the furlough scheme is due to end 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 deal” Brexit also increase the vulnerability of the UK economy. 

Fed signals new approach on inflation

More encouragingly for investors, central banks have signalled that they will remain in support mode for a while yet. 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. Under the new approach, the Fed will target an average inflation rate of 2% – giving them the room to allow the inflation rate to overshoot the target to make up for previous shortfalls.

Given inflation has been slightly below target for several years, this suggests that interest rate rises could be off the cards for a considerable period of time. The change sounds very abstract, but recent history underlines its potential market implications. If the Fed had been following this new framework between 2015 and 2018, it may have raised rates far less than it did – if at all. This might have helped to avoid the economic slowdown and sharp market correction in late 2018.

The symposium also featured reassuring words from the new Bank of England Governor Andrew Bailey, who reminded investors that the Bank would be wary of letting monetary conditions “tighten prematurely”.

US election a potential trigger for volatility

Polls continue to suggest a Biden win is the most likely outcome, but Trump’s prospects have been ticking higher in recent weeks. Markets may be relatively sanguine about a clear result for either candidate, with the Democrats and Republicans each controlling one chamber of Congress. This would likely ensure a relatively high degree of continuity in the tax and regulatory environment. A Democrat win in both the senate and presidential races would likely open the door to more significant change.

One key point to bear in mind is that trade and technology tensions between the US and China would not disappear with a new president. While Biden would probably pursue a more diplomatic course in international relations, a tough line on China has broad cross-party appeal.

A more concerning possibility is the risk of a long delay until the result is finally known and potentially a contested election. As a result of coronavirus, US states are making it easier to vote by post in November’s election. President Trump has suggested this could lead to “the most INACCURATE AND FRAUDULENT Election” in history. The remarks at least raise the possibility that the election result will be challenged. Uncertainty over the outcome would be unwelcome to markets.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


Caspar Rock
Chief Investment Officer


The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.