Understanding the marketsUnderstanding the markets

Investment Comment November 2020

Coronavirus cases continued to rise globally in October, and several countries saw a return of lockdown measures aimed at containing the virus. Political events continue to influence markets and macroeconomic developments, as epidemiological changes force governments around the world to make difficult decisions.

US equities declined towards the end of October, despite bumper earnings from technology companies, with the MSCI US index declining 3.76%. Joe Biden and Donald Trump continued their fierce debates over the handling of coronavirus and America’s prospects and direction after it recedes. As in 2016, polls showing a substantial lead for Biden appear to have been misleading, as the contest proved much more closely run than forecast. In an election with the highest voter turnout of recent decades, the US electorate appear to have favoured Biden’s platform of green investment and social and economic reform over a second term under President Trump. The result may be tied up with litigation in the coming weeks, but we do not anticipate significant long-term disruption.

Attorney General William Barr orchestrated a federal anti-trust suit against Google and parent company Alphabet just before the election, in the first of what looks to be many federal litigations against high profile technology companies. At the centre of this suit is $8bn in annual payments that Google makes to Apple to ensure Google is the default search engine on all Apple devices, which the Department of Justice (DoJ) contends is injurious to consumer choice. The case is being compared to the DoJ’s prosecution of Microsoft around the turn of the century, with potential industry wide implications if successful. Clamping down on the power of these companies has rare bipartisan support, even if the reasons behind the support are different, and the efficacy of the prosecutions is as yet unproven.

European equities were the worst performers in October, as the MSCI Europe ex-UK index declined 6.63%. Conversely, demand for European Union bonds far outstripped supply, as a new €17bn issuance was nearly 14 times oversubscribed. While the yield on the debt is negative, it is less negative than German bunds, the previous proxy for EU-wide creditworthiness, and carries the same AAA rating. The bonds were also to be raised for ‘social’ purposes, adding interest from ESG debt investors. This was an important step in the unification of European Union finances, demonstrating clear investor interest in pooled debt, and paving the way for the creation of a top rated market for debt in an economy of comparable size to the United States.

Italy and Spain, the two European countries that experienced hard lockdowns in spring, have reinstated many of the measures aimed at containing the virus. Already weakened sectors such as hospitality and tourism can scarcely afford a repeat of total lockdown, and unemployment is at present abated only by wage support schemes that cannot extend indefinitely. The European Central Bank announced further stimulus measures may be necessary in December, readying a further €500bn to add to the bond buying programme already in place. However, no new measures were announced even as European countries headed into a winter of renewed lockdowns.

Asia Pacific equities held up across October, as the MSCI Asia Pacific ex-Japan index rose 1.99%. The Chinese Communist Party began its five-year policy review in October, setting out a number of strategic goals. Under pressure from the United States and other Western nations, China is seeking to bolster its internal supply chains. This means less reliance on exports, more support for national technological development, and a move to become self-sufficient in key areas such as food and energy production. Xi Jinping pledged China would become a carbon-neutral country by 2060, sparking a rally in clean energy stocks.

India signed a defence agreement in October with the United States to counter China’s regional power. Deepening military ties with the United States may presage greater economic co-operation, as US companies and investors increasingly look to India to provide the untapped growth and opportunity China once presented. Many US tech companies have sought to buy in to the growth of India via Mukesh Ambani’s Reliance Jio, which offers low cost internet connectivity and services to hundreds of millions of Indian consumers. While the country grapples with one of the biggest outbreaks of Covid-19 however, it seems like any relocation of investment and capital will have to wait. China’s capital markets have seen strong global interest as it recovered from the virus and this has encouraged foreign listed tech companies to return to list in Shanghai and Shenzhen.

UK equity markets continue to trail the rest of the world in terms of recovery, with the MSCI UK still down over 20% YTD, and 5.33% in October. The UK has signed a trade deal with Japan, the first post-Brexit trade deal with a major nation. Japan is the world’s third largest economy, and the deal covers the same provisions as the previous EU-Japan trade deal while adding some elements on digital trade. The UK is moving closer to signing the most critical deal of all, with the European Union, as key hurdles such as state aid and competition have almost been overcome. However, some points such as access to territorial waters for fishing remain unresolved, and negotiators have until mid-November to hammer out a deal before having to return to their national parliaments.

Japanese equities ended their strong run and the MSCI Japan index edged down -1.98% in October. The Japanese Government also announced ambitious sustainability targets this month, pledging to be carbon neutral by 2050, matching the EU and 10 years earlier than China’s 2060 commitment. Japan is heavily dependent on fossil fuel imports having shut down its nuclear power stations after the Fukushima disaster, and new Prime Minister Yoshihide Suga has prioritized investment in green technologies such as solar and battery manufacture. Meanwhile the Bank of Japan forecast slow growth until the end of its fiscal year in March 2021, and for deflation to continue with prices forecast to fall 0.7%. Even with Suga’s promises to invest heavily in future technologies like renewables and automation, Japan faces a struggle to shake the past 30 years of low growth and inflation.

Emerging Market equities performed well in October, ending the month up 1.30%. However, this conceals the dispersion in economic situations within the index. For example, in Turkey, currency depreciation, spiraling inflation and associated challenges with servicing dollar-denominated debt have the potential to exacerbate the problems Turkey faces in dealing with the temporary destruction of its important tourism industry. By contrast emerging markets with stronger institutions, creditworthiness, and monetary policies such as Vietnam and Taiwan may emerge from the crisis well placed to push on to middle or even high-income brackets.

Major political events in November overshadowed the markets in October, combined with returns to lockdown in many regions, and equity markets edged lower towards the end of month. Brexit, the US Election, and the five-year congress of the Chinese Communist Party will all have substantial effects on market sentiment and policy directions in these major regions. Uncertainty remains elevated, although both equity and fixed interest markets remain stable. As always, Cantab recommends a globally diversified portfolio invested with long-tenured, proven managers to navigate through these uncertain times.

 

Risk warnings

This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at the date above, both of which may be the subject of change in the future.  The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice.  Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority.  As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling.  Investments in stocks and shares should therefore be viewed as a medium to long-term investment.  Past performance is not a guide to the future.