Uncertainty returns on three fronts
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, the approaching US presidential election, and the seemingly intractable impasse on fiscal stimulus. In local currency terms, the UK was one of the better performing markets, edging 1.5% lower, but the weaker pound boosted overseas returns in sterling. Japanese shares rose 4.5%, Asian and emerging markets remained flat, and European and American shares fell by around 1%.
Central banks plead for fiscal support as governments diverge
Central banks returned to the fore, more through their words than their actions. The consensus from the US, UK and European central bankers was that economic 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 what central banks could do on their own, the collective plea was for further fiscal measures from governments.
The contrast between governments on either side of the Atlantic was stark. In the UK, the chancellor had found popularity easy while distributing billions to ease the pain, and was well aware of the need to at least partially replace the tapering furlough scheme. Even the normally thrifty German coalition committed to job-preserving subsidies until the end of 2021, on top of the EU bailout package. In the United States, however, politicians were unable to agree on a package to replace the CARES Act aid that had ended in July. President Trump then announced a halt to negotiations until after the November elections.
The Fed targets average inflation and signals rates at zero for three years
Two significant announcements came from the US Federal Reserve. Chair Jerome Powell declared that in future the Fed would target an average inflation rate of 2%, the nuance being that because inflation had been below the target for a considerable period, they would allow it to exceed the current target for a time without raising rates. Additionally, while holding interest rates at zero, the Fed signalled that this level would be maintained for the next three years, and that policy would only be tightened when the economy reached a combination of 2% inflation and maximum employment.
In the UK, inflation hit a five-year low of 1% and GDP for July showed a rise of 6.6%. The Bank of England's Monetary Policy Committee said the economy had performed better than expected but stood ready to provide further stimulus, including the possibility of cutting interest rates to below zero.
Bond markets diverge on the outlook
Fixed interest bonds varied from a 2% gain on UK government debt to a 1% loss on high-yield bonds, with investment grade debt broadly unchanged. With UK inflation at a five-year low and increasingly difficult to beat with a cash savings account, even short of tying money up for a year or two, we felt that record low bond yields would boost the attractiveness of equities. There might be further pain in the short term, but a diversified portfolio would offer better gains in capital and income over the medium to longer period.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
The election, Brexit and the pandemic converge
Approaching the 3 November US presidential elections, the incumbent was consistently behind in the polls. While the polls might not prove accurate, a lively few weeks were expected as President Trump sought to gain the upper hand. Investors' greatest fear was the state of flux that would be created by Trump losing the vote but refusing to accept the result; he was already on record criticising the perceived frailties of the postal vote.
In the near term, asset prices would respond to uncertainty over the election and, more locally, whether the ongoing game of Brexit poker would produce a satisfactory outcome. But the overriding influence would remain the pandemic. We could not predict whether COVID-19 would escalate into a devastating winter wave, or whether news would emerge of a credible vaccine. Both had obvious economic and stock market implications. However, in general we expected markets to remain unsettled but, unless the news worsened markedly, for central bank buying and the search for income to offer support.
With interest rates close to zero, there remains a great deal of money looking for an alternative home.
That members of the Bank of England's Monetary Policy Committee were exploring the use of negative interest rates was a concern. In return for prolonging the life of certain companies, this policy would render savings accounts impotent and constrain the ability of banks to make profits. Even with headline inflation at a five-year low, it was becoming increasingly difficult to beat it with a cash savings account. With bond yields at or close to record lows, we felt this would boost the attractiveness of equities as an asset class.
Given the balance of risks, we were comfortable holding a good cash weighting but felt we might be reaching a time to edge a bit more back into the market. We continued to evaluate potential new funds.
Cash ready to deploy
We held considerable cash levels ready to deploy and had been actively evaluating potential new funds for inclusion across the portfolios.
Time to edge back in
Given the balance of risks, we felt we might be reaching a time to increase exposure, while remaining mindful of the significant uncertainties surrounding the election, Brexit and the pandemic.
Diversified across alternatives
Our portfolios diversified risk by investing in a wide range of assets using actively managed funds with sound investment processes. Alternative holdings included gold and silver, infrastructure, agriculture and absolute return strategies.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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