Investment Comment October 2020
1st October 2020
The global equity market rally that had powered stocks into positive year to date territory lost steam in September. The MSCI World ended the month down 0.05% in September and 4.22% on the year. A resurgence in Coronavirus cases across Europe, and fears of a ‘fiscal support cliff’ in many countries if policymakers cannot move fast enough, dented market confidence and triggered a sell off in risk assets. US tech stocks led the decline, with Apple, Alphabet, Tesla, and Facebook all down around 10%. By comparison, global bond markets, both government and corporate, were relatively sanguine. Whether investment sentiment is really turning or this sell off was just profit taking in an overheated corner of the stock market remains to be seen, but one fact remains clear: the effects of the Coronavirus continue to significantly influence global markets.
US equity markets had their worst month since March, led by declines in the technology sector. The MSCI US index finished September down 0.75% (-4.58% in USD terms). The VIX index, which measures volatility in the S&P 500 using option prices as a proxy, remained higher than in August, but significantly below levels seen earlier in the year. This was driven in part by US lawmakers disagreeing on the scale of the next round of fiscal stimulus, and, as the Presidential election looms in November, partisanship potentially complicating the passage of any further measures. Democrats have been pushing for a $2.4 trillion relief package, which Republicans argue is too high. Jerome Powell, Chairman of the Federal Reserve, underlined the need for fiscal support to match the monetary support provided by the Fed on September 23. While tech stocks declined significantly, the sector remains one of the strongest performers this year.
The MSCI Asia Pacific ex Japan index rose 1.03% in September. China continued to see inflows to both equities and government bonds. FTSE Russell approved the inclusion of Chinese government bonds in its influential World Government Bond index, which could drive as much as $140bn of inflows from passive and tracker funds. As the epicentre of the virus and the first country to institute a lockdown, China bore the economic pains of Covid-19 several months before the rest of the world, and has so far avoided a second wave. This will be tested in October as approximately 600 million people travel internally for a holiday known as Golden Week. Likewise, South Korea and Taiwan haven’t seen resurgent spikes in infections. By contrast, case numbers remained high in Indonesia and the Philippines. Consequently the divergence between developed and developing economies in the Asia Pacific was stark, as Taiwan’s GDP only contracted 1.4% in the second quarter, compared with a 15.2% contraction in the Philippines. Moreover, countries in the Asia Pacific region with the best infrastructure to deal with Covid-19 also tended to have economies geared towards services and high-tech manufacturing, which were more resilient sectors compared to low-tech manufacturing and raw material processing on which less developed Asia Pacific countries tend to rely.
EU and British officials accelerated talks to come to a Brexit deal, as the end of year deadline looms. Concerns around access to the City of London, Europe’s premier finance hub, were partly addressed by agreements on derivatives and clearing houses, the two most immediate sources of financial stability concern should no deal result. However, the treatment of securities and exchanges is unresolved. Coronavirus numbers rose in September across Europe, particularly in Spain and France. Madrid has instituted a strict second lockdown, with 800,000 nominally not allowed to leave their district unless for school, work, or for medical reasons. Despite this, European equity markets remained calm on the month, as the MSCI Europe ex UK index rose 1.07%.
Sterling came under pressure in September as a combination of Brexit fears, a second lockdown, and the question of additional fiscal stimulus depressed the currency compared to developed market peers. The pound rallied to end the month higher, however, as the Bank of England signaled an aversion to negative interest rates and that a Brexit deal was within sight. Chancellor Rishi Sunak announced further measures to prevent mass redundancies, including a six-month job support scheme for part time workers and flexible loans to businesses. The MSCI UK index rallied to end the month up 0.19%. UK equities continued to lag the rest of the world in 2020, with large index exposures to industrial and financial stocks that have suffered during Covid-19, and a dearth of technology and healthcare stocks that have prospered this year. In addition, HSBC and other banks were named in a money laundering report.
Japanese equities continued their strong run from August, as the MSCI Japan index rose 5.16%. The question of who would succeed Shinzo Abe was settled by a comprehensive victory for Yoshihide Suga, a long time Abe ally, in a leadership vote by the ruling Liberal Democratic party. The vote was closely watched by Japanese market participants, and importantly Mr Suga looks set to continue the monetary, fiscal, and governance reforms of Abenomics. He has also been a proponent of digitization in Japan. Despite a high-tech manufacturing sector, the vast majority of small transactions are still made in cash and civil servants must often ink stamp documents. Whether Suga can follow through on these ambitious projects with the backing of the notoriously factional LDP remains to be seen, but equity investors have, for now, cheered his ascension.
Three of the world’s largest emerging markets, India, Russia, and Brazil struggled to contain coronavirus cases, only surpassed by the United States total number of cases. Despite this, emerging market equities have held up in the pandemic, as the MSCI Emerging Markets Index ended September broadly flat being up 1.28% since the start of 2020. In addition, with developed market government bonds yielding below zero, interest has also picked up in EM debt. With higher yields comes higher risk, however, and the structural damage wreaked upon Emerging Market economies means lower tax receipts, and higher chances of default.
Bond markets globally remained stable, as credit spreads between major government bonds and corporate bonds have tightened, implying a continuing normalisation in credit. Investors will be very much aware, however, that rising case numbers in areas that had successfully repressed the virus in the summer will be a cause for concern. Until a vaccine is successfully implemented, or by chance the virus dies away naturally, investors cannot afford to be complacent. Cantab therefore recommends holding a globally diversified portfolio of different asset classes, managed by managers with proven long term track records in their respective fields.
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.