There are signs of economic improvements as we come closer to the end of this remarkable and devastating year.
- Monday, October 19, 2020
We will soon be starting our research and analysis for Edition 34 portfolios, and at this stage we are feeling reasonable positive over the outlook for global equity markets despite the recessionary pressure, unemployment levels and second wave lockdowns. Equity values remain consistent with a V shape recovery but any move to more of a second wave inspired W shape recovery will hurt valuations. There are signs of economic improvements as we come closer to the end of this remarkable and devastating year.
We expect the combination of liquidity provided by central banks and the gradual economic recovery to support further gains in markets. These gains will undoubtedly be tested by periods of negative sentiment, but second wave mortality rates are likely to be lower as hospitals are better prepared and there is increases optimism of a vaccine before year end.
Amongst the equity markets, we remain most positive on the US. Despite being expensive, US stocks look set to outperform on the back of a US$2tn investment package from a Joe Biden administration and a US$120bn per month QE programme from the Federal Reserve. Equally in Europe, the support from the ECB is also unprecedented with its €750bn Pandemic Emergency Purchase Programme.
We are likely to ease our UK holdings due to the poor performance by the FTSE 100 over the past 4 months, the impact of further lockdowns and any Brexit uncertainty. However, a good Brexit deal could boost the UK with sterling rising in value.
We are positive over Chinese, Asian and Japanese stock markets as they are all further into recovery than other global regions and have managed the virus well. Monetary policy is very accommodating and a weaker US$ has helped monetary conditions. We therefore expect to move some UK exposure to China and Emerging Markets.
As far as the credit and bond market is concerned, we have maintained a defensive position in US and UK government bonds and some longer duration credit. These positions have offered our portfolios protection if economic recovery were weak and further lockdowns bring a W shaped recovery.
Since March, spreads in yields between government and corporate credit has closed. Investment grade spreads are back to pre-crisis levels while high yield bonds are back to 80% of per-crisis levels. Government bonds are offering little value at present and are really only held as a defensive play. Yields are trading at historical lows due to QE and historically low interest rates, and therefore valuations, are expensive. We expect to move some of our UK government gilts to the corporate credit markets as we remain positive on investment grade corporate bonds, and are happy now to re-introduce some short duration global high yield bonds as the purchasing programmes from the Fed continue to support this market.
We are a little bit more confident that things will slowly but progressively improve given the substantial liquidity provision provided by the Fed, ECB, Bank of England, Bank of Japan and Peoples Bank of China. Analysts have improved their outlook for 2020 as a result of the better than expected performances in both Q2 and Q3. The global economic recovery is still following a V shaped recovery but the greatest risk to this outlook is the growing number of people forced to spend more time indoors as the Covid-19 virus spreads more rapidly. As the northern hemispheres winter approaches the number of incidents of Covid-19 will rise, particularly as the cold weather comes. Rising contagion and further lockdowns will result in a second wave decline in economic activity leading to the chance of a W shaped recovery. For a V shape recovery to be realistic, the world will need a working vaccine by year end. There are reports of good progress being made in the role out of a mass vaccination programme in the UK being available from mid-December so long as the vaccine testing continues to be successful.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.