Investment officeOctober 7 2020

Sandaire: Investment Office Third Quarter Update 2020

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Welcome to our report on the third quarter of 2020 and our outlook for investment markets.

The mainstay of portfolios, global equities and bonds, continued their liquidity-driven recovery into the third quarter, as on-going fiscal and monetary support to alleviate the economic pain of the virus related lockdowns, buoyed risk assets through July and August. September, however, became the month the West realised it needed to evolve to live with the virus longer term and that the initial emergency measures could not and should not be repeated. Instead, more measured approaches are being adopted to increase economic activity and reduce support whilst keeping a lid on the rising caseloads of the second wave.

The total number of daily new cases reached new highs with Europe, in particular, trending upwards, as Spain and France were especially hard hit. Better testing and tracing capacity has allowed European policymakers to tackle this wave with targeted measures so far, including travel restrictions or the requirement to wear a facemask in public, instead of the more economically damaging blunt instrument of broad national lockdowns. Experiences have differed from country to country. While London’s tube use remained over 60% below pre-COVID levels, China’s incredible success in containing the virus has allowed subway use in its major cities to recover to just 10% below levels seen last year. This, alongside US dollar weakness, has driven Asia’s strong relative performance over the quarter, making it the joint best-performing equity region year to date, up over 5% (in sterling terms).

Markets in July were mixed, as regions reacted to data releases confirming the severity of the downturn in the second quarter. US equities shrugged off the bad news and led the gains throughout July, supported by robust quarterly earnings from the biggest technology, media and online distribution companies. This was at odds with the situation in Europe, with Eurozone equities down over the month. Government bond yields also fell on this disappointing economic data.

A more positive story emerged throughout August as major data releases pointed to continued economic recovery. Consequently, shares were broadly higher all round in August, with US equities reaching all-time highs. Indications that the worst of the economic dip was over usurped escalating tensions with China, with Washington clamping down on Chinese chipmakers and the World Trade Organisation ruling that tariffs imposed on Chinese goods in 2018 were “inconsistent” with international trade rules.

In a significant shift in monetary policy, the Federal Reserve announced a move towards average inflation targeting, allowing inflation to run above the 2% target to compensate for periods of below-target inflation. Rates are therefore likely to remain lower for even longer, providing lenders with ongoing easy conditions for an extended period and greater clarity in their business planning. Emerging market equities were pushed further upwards on the back of this news. Aside from this adjustment, major central banks took a back seat throughout August, having already brought rates close to their lows and flooded the market with liquidity.

Governments, however, have faced further pressure to provide additional fiscal support.

Congress debated the extension of unemployment benefits and provision of stimulus cheques, with congressional disputes delaying the approval of a new package.

Towards the end of August, Shinzo Abe, Japan’s longest-serving Prime Minister stepped down on health grounds. The Liberal Democratic Party elected Yoshihide Suga to stand in for the remainder of Abe’s elected tenure, which was due to end next September. Suga, the son of a strawberry farmer, had been a long-standing supporter of Abenomics, and thus his appointment was a vote for continuity in a time of uncertainty.

For much of the year, the gap between winners and losers had never been starker, with e-commerce and ‘new economy’ stocks performing strongly, while those from ‘value’ parts of the market, such as airlines, banks, and commodity producers, suffered severe share price declines. In this environment, the tech-heavy US equities led returns while value-tilted UK equities suffered. September, however, saw a tentative correction in these US growth stocks, which came under some selling pressure, having benefited so far this year from the pandemic-induced shift to online services. The slight outperformance of value may indicate a reversion of the growth/value trade, as sales at physical stores begin to rebound, while online sales are declining from stretched levels.

September also saw a meaningful move lower in sterling, likely due to the lack of progress in the Brexit negotiations. Brexit discussions were further complicated by the placing of the Internal Market Bill before parliament, in an attempt to override terms of the EU withdrawal agreement regarding trade between the UK and Northern Ireland.

To read StJohn’s full update, including his outlook, summary, total asset returns and currency pricing, please click here.