Second Waves Weigh on Recovery Hopes Ahead of the US Election
Equity markets declined this week as rising coronavirus infections and tougher lockdown measures added to concerns about the economic hit from the pandemic, while investors pause ahead of a tumultuous US election next week. But while we are seeing significant volatility in markets on an intra-day basis, the key is not to panic. This is expected given current events and does not change our outlook or positioning moving forward.
What’s Moving Markets this week
Markets in the US slumped this week on rising virus cases and a failure to agree on a new US economic aid package prior to the election next week. With covid-19 cases still on the rise across the US, markets had been pricing in more stimulus, however talks ahead of the election have now broken down. Stimulus is still expected to come before the end of the year, with even more expected next year should the Democrats gain both the House and the Senate, however the delay in aid continues to weigh on the short term outlook, with investors taking profit following strong performance in recent months.
Another source of volatility in markets ahead of the vote is the possibility for a contested election, with Biden’s lead in the polls narrowing with one week to go to. Markets were very much surprised four years ago, so investors will be watching the polls closely for any shift in expectations over the coming days.
For more information on the US election and our expectations, please see the attached Market Update document.
As a busy earnings week continues on both sides of the Atlantic, investors are looking ahead to what the final months of the year may hold for key index constituents, particularly when confronted with second waves of infection over the winter months and new lockdown restrictions.
In the UK, internal government projections suggest that the nation is now on course for a prolonged second peak of infections. While the number of daily deaths will be lower than during the first peak earlier this year, it is expected to remain high for longer, with modelling indicating that restrictions will remain in place through to December. In recent weeks, we have seen a tightening of localised social restrictions across the UK in an attempt to bring case numbers under control. Since the new measures were introduced, the data suggests that we could be past the peak in infections, however it is still early to make a clear comparison.
With coronavirus infections surging across Europe, German Chancellor Angela Merkel is pushing for tougher restrictions on movement and contact this week, including closing bars, restaurants, and leisure facilities until the end of November. She is expected to hold discussions with regional premiers later today before announcing any new measures. With the rate of transmission peaking once again, effective contact tracing has become impossible in many parts of Germany, with more restrictions likely needed to control the spread of the virus.
While the situation in Germany is rapidly deteriorating, governments across Europe are also facing similar issues. French President Emmanuel Macron is expected to become the latest leader to announce tighter restrictions later today, with a similar one-month lockdown likely to be announced as leaders attempt to gain control over infection rates before Christmas. In response to the new restriction expectations, European stocks experienced a sharp decline in today’s trading session, with the measures expected to slow the pace of recovery in services. The European Central Bank is due to meet on Thursday to discuss the growth trajectory, however economists are not expecting any stimulus moves until the December meeting.
With European and US equity markets appearing increasingly turbulent and facing significant short-term headwinds, Asian equities are well placed to benefit on the back of China’s seemingly robust recovery. China’s recovery has led that of other major economies so far this year and its monetary policy has not been eased as much as in the major developed economies, leaving its interest rates significantly higher. This has made Chinese financial assets relatively more attractive, driving capital inflows. Additionally, China’s current account surplus is on the rise again due to its strong export performance and a plunge in outbound tourism spending as international traffic has evaporated. Chinese assets are also well positioned for a potential Biden presidency given a deteriorating relationship with the Trump administration so far this year, with risks likely to reduce somewhat on the expectation for more orderly negotiations in the future.
While intraday market movements can be concerning, it is important to note that these levels of volatility were expected, with expectations that we would see a resurgence in Covid cases moving into the winter months. That being said, our understanding of the virus has improved significantly since earlier in the year, and the death rate is subsequently lower. Additionally, we are now much closer to finding an effective vaccine, with a number of promising phase three trials due to report in the coming months. Looking at the economic impact of the new restrictions, as long as lockdowns remain social and limited (given very little appetite for more restrictive lockdowns), economic activity will continue, and our outlook remains unchanged.
Overall, we knew that the US election, Brexit and rising virus cases would result in a high level of market volatility in the short term, however in the medium and long term view, we expect to see a continuation of the recovery in economic conditions and further support from central banks and governments. This will provide support to risk assets looking past the near-term weakness, with risk being rewarded over the long term. At the same time, we see opportunities for upside surprises in the vaccine news flow and stimulus developments alongside political surprises. On a market level, we have tracked back to where we were at the start of September, which is not surprising given current political headwinds and lack of stimulus in the US. As a result, we are not concerned about the short-term volatility we are seeing, and the portfolios remain well positioned to withstand near term volatility.
Key Events We Are Watching This Week:
- Thursday: US Q3 GDP Data, ECB Interest Rate Decision
- Friday: European Q3 GDP
- Monday: Chinese Manufacturing PMI
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document.
Model Portfolios & Indices
Global stock markets continued to display high levels of volatility over the week as countries across the world battle with surging virus cases, the announcement of new lockdown restrictions and political uncertainty. The portfolios declined over the week as markets slumped, however performance remains positive on a 1-month basis following recent outperformance. Looking ahead, we are optimistic on the medium-term outlook from here, accepting further volatility in the near term, but confident in our positioning, with well diversified portfolios which have been designed to weather these market conditions. Year to date, in comparison to the benchmarks, we have recovered from the March coronavirus decline, and we are in a strong position moving forward.
*it should be noted that the benchmark data is a day lagged due to a lagged reporting feed on FE Analytics
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 1962, Soviet Premier Nikita Krushchev capitulated to US demands to halt the delivery of nuclear-armed missiles to Cuba, bringing an end to the Cuban missile crisis.
Have a great week,
Jason & Gina