Coronavirus (COVID-19) Update – 30th October 2020
Since our last update, the weather has turned distinctly autumnal, the clocks have gone back and a so-called “second wave” of virus infections appears to be taking hold across Europe. The UK is grappling with a multi-tiered system of coronavirus restrictions whilst France has just announced a second national lockdown. Meanwhile, across the pond, there is much talk of a “blue wave” in which Democrats take both the Senate and the Presidency in the forthcoming election, although a marked increase in stock market volatility in the past week would suggest that investors remain fearful of a contested result.
Over the past seven weeks from 9th September 2020 to 28th October, the MSCI World index has declined in value by 3.45% (Source: FE Analytics, Total Return, GBP). This is largely as a result of the most recent sell-off, as virus news has worsened and with the US election looming ever closer.
Rather depressingly, once again the UK market is one of the laggards with the FTSE 100 having fallen by 7% over the same time period. Only the FTSE World Europe ex UK index fared worse, as investors start to fear the effects on economic activity of new Covid prevention measures in previously resilient Germany and further damage to France, Spain and Italy.
Notably, in Asia, where the authorities appear to have won the battle with the disease, markets are continuing to generate positive returns. Over the same period the MSCI AC Asia ex Japan index has risen 4.94%, bringing its year-to-date return to 9.35%, outperforming the S&P 500 return of 2.32%. So far this year, the FTSE 100 remains firmly under water with a decline of 22.91%. It remains the base case of most of the strategists we speak to that there will be some sort of a Brexit deal, despite all the distracting talk of an Australian, in other words no deal, deal but clearly there is still a lot of Brexit related malaise being reflected in UK valuations. More promisingly, the value of the pound versus the dollar is holding up reasonably well offering some grounds for optimism.
Whilst the headlines are full of rising infection rates and further restrictions, the latest round of economic data in the form of Purchasing Managers’ Indices released last Friday continued to show a positive trend with the IHS/Markit flash US manufacturing PMI posting a reading of 53.3 up from 52.3 in September whilst eurozone manufacturing PMI rose to 54.4 in October from 53.7 the previous month. The picture in the UK is less positive with both the services and manufacturing PMIs declining from 56.1 to 52.3 and from 54.1 to 53.3 respectively. However, both readings remain above fifty indicating an expansion in economic activity and globally, fiscal and monetary policy remain accommodative. Indeed, with the virus showing no signs of having gone away in the US or Europe the authorities have little option but to continue to prop up their economies and with government bond yields remaining low, equities continue to look relatively attractive.
Turning to two of the funds we have highlighted over the past few months, particularly in relation to growth versus value debate, Liontrust Special Situations (growth) has outperformed Man GLG Undervalued Assets (value) during the period under review, extending its lead since the beginning of the year. We have often talked about the drivers of what may lead to a reversal in this growth/value trade with the resurgence of inflation being a key factor. Should the Democrats win convincingly next week and embark upon a major programme of fiscal expansion then this could signal a significant shift in the current market narrative and value investing might not be dead after all.
As ever, we encourage our clients to remain sanguine in the face of increasing event driven market uncertainty and to maintain diversified portfolios.
We hope that all our clients stay safe and well. Please do get in touch if there is anything you would like to discuss further.
30th October 2020
RiverPeak Wealth Limited