Global Market Overview – September 2020

In September our optimistic view on the outlook for risky assets was challenged almost immediately by the political and media narrative of a second wave of COVID-19. As schools reopened and the weather turned colder, the UK started to see a rise in positive tests. Local lockdowns began to occur throughout the country.

The (understandable) negative social reaction to the prospect of further restrictions has masked the fact that the economic prospects are a lot brighter than they seem, especially when we look at the rest of the world. The US economy is starting to get going and unemployment is falling sharply, as the largest policy stimulus in history takes effect.

Chinese authorities are talking about whether the recovery is too strong – and Wuhan is now open for international flights, if you’re looking for a holiday spot. European manufacturers are seeing demand for goods rise strongly, although the tourism sector does continue to struggle.

September was almost exactly as bad as August was good. In August, Apple rose from being a $1.8 trillion company to one worth $2.3 trillion. By the middle of September, it was worth $1.8 trillion again. Losing $500 billion of value in three weeks isn’t good going in anyone’s book.

In fact, despite the rise in negative press about COVID-19 cases, the market shakeout in September was more a reflection of investors re-evaluating the prospects for large technology companies which had driven the market higher this year. With the tech-heavy Nasdaq index up 40% at the start of September, people started to take profits – and when “hot stock” names such as Tesla start falling, the momentum picked up quickly.

In fact, the US equity market was the worst performing developed market over the course of the month, down nearly 5% while the likes of the FTSE 100 and Europe were down less than 2%. Bond yields fell slightly in September, resulting in positive returns for government issued debt.

Core views

Surge & Burnout of COVID-19 makes us optimistic… Although the virus remains a threat to human life, we believe the scale of this threat may be exaggerated. Economies could be open for business sooner than we expect. Positive for credit and equity.

The economic recovery could set records for speed and size… The world has never seen as much coordinated stimulus as in the past five months. A rapid V-shaped economic recovery is a higher likelihood than it seemed a few months ago. Positive for credit and equity.

Lagging assets should do well… Much of the first stage of the rally has been concentrated in well-known technology – and understandably so, given their resilience to coronavirus, and their balance sheet strength. In a more conventional economic recovery, though, other parts of the market could start to rally too. Positive for credit and equity.

Summary

Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.

September 2020

With thanks to Seven Investment Management LLP for their views and market thoughts.
RiverPeak Wealth Limited

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