Commentary on September 2020
After hitting record highs throughout August, US shares dragged stock-markets lower in September as unease spread over the likely duration and intensity of the pandemic, and the ongoing Brexit shambles. In local currency terms, the UK was one of the better performing markets, edging 1.5% lower, but the weaker pound boosted overseas markets when translated into sterling. Japanese shares rose by 4.5%, Asian and emerging markets remained flat and European and American shares fell by around 1%. Fixed interest bonds varied from +2% on UK government debt to -1% on High Yield (junk bonds); investment grade debt was broadly unchanged.
Central banks returned to the fore, more through their words than their actions. The view emanating from the US, UK and European bankers was that data had generally been better than expected but that economies remained finely poised and still in need of further stimulus. With interest rates close to zero limiting central bank initiatives, the collective plea was for further fiscal stimulus measures-the contrast in attitude between governments in the UK and Europe on one side and the United States on the other was stark.
On this side of the Atlantic there’s been an understanding that prompt action on further measures is necessary; Rishi Sunak has found popularity easy whilst dishing out billions to ease the pain and was aware of the need to (partially) replace the tapering furlough scheme amongst further initiatives. Even the normally thrifty German coalition has committed to job-preserving subsidies until the end of 2021; this on top of the EU bailout that doesn’t start until next year. In the US however, politicians have been unable to agree on a package to replace the CARES Act aid to the unemployed that ended in July. And this week, President Trump announced a halt to discussions until after the November elections.
Two significant announcements came from the US Federal Reserve; firstly, Chair Jerome Powell declared that in future they would target an average inflation rate of 2%, the nuance here being that, because inflation has been below the target level of 2% for a considerable time, they would allow it to exceed the current target for a period of time without raising rates. And secondly, whilst holding interest rates at zero, they also signalled that this level would be maintained for the next three years and that they would only tighten when the economy reached a combination of 2% inflation and maximum employment.
With UK inflation hitting a 5-year low of 1% and GDP for July showing a rise of 6.6%, the Bank of England’s Monetary Policy Committee said that the economy had performed better than it had expected but that it stood ready to provide further stimulus measures to aid the recovery, including cutting interest rates to below zero.
Approaching the 3rd November US Presidential elections, the incumbent is consistently behind in the polls. Whilst the polls may not be accurate, we can probably expect a lively few weeks as President Trump seeks to gain the upper hand. He does this best by courting controversy and dividing opinion and he might be desperate enough to sacrifice his love affair with the stock-market. Currently, investors’ biggest fear is the state of flux that would be created by Trump losing the vote but refusing to accept it; he’s already on record criticising the frailties and potential for fraud from the postal vote.That members of the Bank of England’s Monetary Policy Committee are exploring the use of negative interest rates is a concern. In return for prolonging the life of ‘zombie’ companies this policy will render savings accounts impotent and constrain the ability of banks to make profits-love them or loathe them, we need a healthy banking sector. Even with headline inflation at a 5-year low it’s becoming increasingly difficult to beat that with a cash savings account, short of tying your money up for a year or two. With bond yields at, or close to, record lows we feel that this will boost the attractiveness of equities-there may be further pain in the short-term but a diversified portfolio will offer better gains in capital and income over the medium to longer period. In the near term, asset prices will respond to uncertainty over who will next govern the free world and, more locally, whether the ongoing game of Brexit poker will produce a satisfactory outcome. But the over-riding influence will remain the pandemic. We can’t predict if Covid-19 will escalate into a devastating winter wave, or whether news will emerge of a credible vaccine; both have obvious economic and stock-market implications. However, in general we expect markets to remain unsettled but, unless the news worsens markedly, for central bank buying, and the search for income, to offer support.
How are we currently positioned?
Given the balance of risks we’re comfortable holding a good cash weighting but think that we might be reaching a time to edge a bit more back into the market. With that in mind we continue to hold considerable cash levels ready to deploy and have been busy looking at potential new funds.Our portfolios diversify risk by investing in a wide range of assets using actively managed funds with sound investment processes. Some examples of these ‘alternative’ assets are funds invested in gold & silver, infrastructure, agriculture and absolute return strategies.