During one-month period to 30th September, major equity markets, as measured by the aggregate FTSE All – World Index fell by around 5% but there was again very considerable variation country by country. NASDAQ, Asia excel Japan and S&P led the major area fallers while the UK and Europe declined slightly and Japan was barely changed in absolute terms, and indeed now ,along with S&P, is one of the leading sterling adjusted world indices, year to date. The VIX index rose to 27.2, as more caution permeated the equity markets. Gilts and investment grade corporates rose in price terms, while there were declines in more speculative grades. Sterling fell on most crosses, and the Chinese Yuan strengthened slightly. Commodities were mixed with precious metal and energy names down but gains in certain softs.
Aggregate world economic forecasts increased slightly over the month, the OECD for example now looking for a 4.5% global drop compared with an estimated 6% decline earlier in the year. However, much caution in extrapolating these trends is warranted as, for instance, UK slowly winds down a furlough scheme and USA is still debating the size and duration of emergency income payments. In addition, global COVID data still points to rising active cases, and over one million deaths at the time of writing, and many localised lockdowns are present/imminent. A sharp global V shaped economic recovery looks highly unlikely given the variable and uncertain pandemic progress and related varying policy actions. The variation in growth between countries is much larger than “normal” recessions due to a combination of industrial composition, consumer confidence and stimulus measures.
Asia excl Japan, led by China, is generally in better shape than other major regions, virus response, economic mix, while Japan itself, with a relatively muted COVID experience, is expected to experience a relatively smooth transition under the new PM,Yoshihide Suga.
The overall picture is still one of depressed activity and with rising infection levels, increased hospitalizations, colder weather, uncertain labour market and Brexit (in one shape or form), it is hard to be optimistic for the fourth quarter.
Initial analyst estimates expect an average global corporate earnings decline of around 20%-30% in 2020 with many countries experiencing a similar decline in annual dividend income. In aggregate forecasts for Asian companies show more resilience in both earnings and dividend growth. This especially true in China but also Korea, Taiwan where the combination of better COVID experience and export mix is cushioning the economic blow.
Global Equities showed losses over September ,2020. The FTSE ALL World Index registered a fall of over 5% over the month and is now down a little since the year end, in dollar terms, though up in sterling terms. The UK broad and narrow market indices, both fell by about 1.5%, now underperforming the sterling adjusted world index by over around 23.0% since the beginning of the year. Japan and Europe were the major outperformers while Asia excl Japan lagged the monthly average. The VIX, now at a value of 27.2, remains below 30, suggesting increasing risk tolerance, but still far from a “comfortable” level.
Another very volatile month for UK sectors. Banks,especially HSBC,oil and gas, life assurance and telco’s all fell over 6%,while there were absolute gains for pharmaceuticals, utilities and selected consumer names. Corporate activity is increasing with bid activity involving G4S and William Hill. Since the beginning of the year every single major sector is now in negative territory from oil and gas ,down 60% to Pharmaceuticals down 1.3%.The “average” All-UK unit trust is now down about 18% year to date with smaller companies outperforming significantly and income companies underperforming, the latter often suffering from capital declines as well as reduced income.
Gilt prices rose 2% over the month, the 10-year yield now at 23 basis points (0.23). Other ten-year yields also fell closing the month at US, 0.69%, Japan,0.01%, and Germany, -0.52% Good quality corporate bonds also rose though lower grade, including emerging market debt suffered price declines. See my recommendations in preference shares, corporate bonds, floating rate bonds, speculative high yield etc. A list of my top thirty income ideas from over 10 different asset classes is also available to subscribers.
The weakness of the pound was the major monthly features, cable finishing at $1.293. The Chinese Yuan appreciated further versus the dollar largely on improved trade data and slightly improved US relations. Year to date the the pound has weakened significantly versus the Yen and Euro and emphasises the importance of the FX decision in the asset allocation process.
A generally mixed month for commodities with weakness in oil, gold,other precious metals and iron ore but gains elsewhere, especially amongst the “softs”.
Over the coming period, the one certainty continues to be “uncertainty” regarding the containment of corona virus, as we enter the Northern Hemisphere winter/school return/gradual lockdown ease. Signs of a “pause” in European and US economic activity after the recent rebound are growing, and the outlook for corporates is both variable and uncertain. Earnings estimates for 2020 have been downgraded aggressively while the timing and magnitude of any bounce back makes forecasting, using conventional metrics, a hazardous exercise! The reliability of “E” in the PE ratio will be brought into question, asset value write downs will be significant e.g property sector and dividends will be constrained both for financial and moral reasons. Certain sectors will be subject to state intervention, while others may succumb to administration or opportunistic take over. Longer term changes in consumer habit will also affect corporate fortunes e.g home working.
Following the format of last month, I make the following observations.
· Looking at my three” home-made” stock baskets balanced, high risk covid and covid winners, there have been a significant difference in share price performance, over the approximately six months since the sharp market crash. As the default/placebo performance the balanced fund/FTSE 100 is down approximately 25% from highs of last year, experiencing a bounce of about 20% since March 23rd, although obviously overseas indices have fared much better. The “higher risk” basket is still down 47%,despite the 53% bounce…with many travel/tourist/hospitality names still nursing losses of 70% to 80%.The lower risk basket is down just 10% (no surprise there!) but has shown a bounce of over 60%.This risk return profile is quite unusual.At this time of writing, my preference would be to still run some of the defensive winners, but watch the valuations and avoid some of the “tempting” bargains that seem to be on offer on the higher risk list.
· Currently, there appears to be value in some of the latter category but extra due diligence in the area of fund/stock selection will be required. Many of these names could recover quite sharply but risks of bankruptcy, dilution, government interference/control should be considered. Also expect an increase in corporate activity.
· Emerging Markets-Very difficult to adopt a “blanket” approach to the region with so many different COVID, commodity, debt,geo-political variables. Much of Latin America is experiencing an acceleration in COVID cases, as is India, while closer to home Turkey faces a worsening currency situation However I have a relatively favourable view on Vietnam where the macro factors (COVID success, economic GROWTH!), stable FX,inward investment are positive features.Russia,both bonds and equities, may appeal to value, income oriented investors and actually enjoys a relatively favourable current/fiscal balance situation. Emerging market bonds are starting to weaken after the relative total return outperformance earlier in the year. Please contact for my favoured pooled investment play.
· Not on near term investor (or government!) worry lists but be aware of the huge government DEBT problem building. Latest figures show aggregate global debt in excess of GDP at the global level. Apart from short term haven buying, I expect conventional government FIXED INTEREST to suffer in the long term, but other fixed interest options are available. In the UK, it should be noted that increased supply is occurring at the same time as reduced monthly QE buying.
FX- The pound may continue to be
vulnerable over coming months on a mixture of COVID developments, relatively
weak economic data, Bank of England uncertainty, political wrangling and
ongoing Brexit discussion. Dollar and Euro may be beneficiaries or Yen for haven,
· COMMODITIES-Gold remains firmly in positive territory from the beginning of the year, although weakening recently. There are growing signs that gold jewellery demand has been falling quite sharply I.e recent price rise fuelled almost entirely by investment flows. In several varying areas, supply demand distortions are creating very volatile conditions e.g WTI oil, uranium, palladium, coal. In a UK context it might be worth remembering that plantings and pickings will be disrupted by both weather and labour shortages, which could potentially lead to pockets of food inflation.
· COMMERCIAL PROPERTY…The last few months have seen mixed news from the commercial property sector (Intu, Land Securities, British Land,TR Property, etc),and the key takeaways seem to be very much as anticipated i.e. Further large write downs and weak rent collection in most things retail (excl food retail), steadier but slightly more stable London offices, and strong developments in the areas of logistics, healthcare and storage. European statistics are generally more favourable than UK. Student accommodation, a former investment favourite, is taking a hit from both domestic and international demand. Extra due diligence is currently required in this sector both by asset type (direct equity, investment trust, or unit trust. Many large property funds are re-opening and it will be interesting to see updated cash levels, property valuations and data on investor flows. In selected property sub-sectors my preference remains for investment trusts rather than unit trusts.