Commentary on November 2020
FESTIVE GREETINGS FROM CHARLWOOD’S
Optimism over the likelihood of 3 vaccines, and the change in US Presidency, outshone the near-term worries of rising COVID-19 cases and the re-imposition of lockdowns. Global stock-markets had, by some measures, their best month on record. Europe and the UK led the way with gains of around 13% in sterling terms; shares in Asia and Japan rose by 11% and 8.5% respectively, with Japanese indices hitting a 30-year high. US indexes made fresh highs but the weakening dollar reduced a 10% rally to 7% in sterling terms. Bifurcation in fixed interest markets reflected the more optimistic mood; high yield (junk) and emerging market bonds gained 4% whereas safe-haven government bonds fell by up to 1%.
The pandemic continued to dominate headlines and sentiment, with shares sliding on rising infection rates and global variations of lockdown but then rallying on each announcement of a potential vaccine. With the need for fiscal, rather than monetary, stimulus the United States has yet to agree a package to replace the CARES Act that ended in July. In stark contrast, the UK’s chancellor, Rishi Sunak, has been demonstrably active in being prepared to re-evaluate where assistance should be targeted and allocating further funds from the money tree. Europe, predictably, still hasn’t been able to sign off its bailout fund with Poland and Hungary vetoing the proposal.
As with his predecessor, President-elect Joe Biden’s victory was greeted enthusiastically by investors. This was less a comment on the man himself and more on the combination of a non-Trump victory but with the likelihood of a Republican majority controlling the Senate. Furthermore, early cabinet choices, including ex-Federal Reserve Chair, Janet Yellen, added gravitas to his election.
Numbers from the UK proved what a nonsense short-term economic data is in this environment- a 15.5% rise in third quarter GDP took the Country out of recession, under its technical definition. The US, which insists on annualising its data, showed Q3 growth of 33%! Ironically, China has been the one major economy to show positive growth on the year.
On the global trading front, the Regional Comprehensive Economic Partnership (RCEP) was completed. This is a free trade arrangement which unites South East Asia with China, Japan and South Korea (plus Australia and New Zealand). The Chinese dominated Asian trading block is developing rapidly and filling a void left by President Trump’s America.
Recently, asset prices have reacted strongly to reflect positive news on the vaccines, and the preferred outcome in the United States elections. The extent of this rally does leave stock-markets vulnerable to bad news such as a delay in administering vaccines or, worse still, indications of lower efficacy rates on those vaccinated.
Near term news of the pandemic’s effect on the economy is likely to be poor; this week has witnessed further retailing casualties in the form of Arcadia, Debenhams and Bon Marché. The question is whether markets will continue to look through rising unemployment (currently supressed artificially by furlough payments) and the consequent effects on retail sales and the housing market.
Further stimulus measures matter to markets as their announcement, or omission, will have a profound impact on the risk of further unemployment in travel, hospitality and retail sectors, and the fear of unemployment in general. We have seen positive moves in the UK but these also need to be seen in other countries. However, central bank buying of bonds and investors’ need for income are likely to continue to offer support to asset prices.
Our view for now is that there probably will be set backs but, unless we see a major upset on implementation of the vaccine, we’re comfortable being more fully invested. However, we do have cash left to invest further on the lower to medium risk funds when the picture becomes clearer.
How are we currently positioned?
At the start of November, we reduced cash levels across the portfolios, topping up some holdings and re-introducing the M&G Global Dividend fund across the range of portfolios. We have subsequently added the Threadneedle Latin American fund to our higher risk portfolios.
We remain underweight fixed interest bonds and see little value at close to record low yields-90% of global government debt yields less than 1%.
We added a new fund, the Allianz Strategic Bond fund to our lowest risk portfolios, switching out of the M&G Optimal Income fund. This switch further diversifies the risk of a mandate that requires a higher fixed interest weighting.