Investment Strategy:  Fourth Quarter 2020 – General Market Review

Summary

  • Economic data is steadily recovering and the market is ‘looking through’ this year’s dreadful recession to a meaningful recovery in growth and earnings next year. This may be optimistic given a ‘second wave’ of COVID infections in Europe and the dire situation in the US and emerging economies.

  • The ‘lower for longer’ interest rate and bond yields narrative stretches out ever further, quite likely for most of this decade.

  • Equity markets have continued their recovery, most notably the S&P500. The FTSE is a considerable laggard to other world markets and down by 20% YTD.

  • A striking feature is the huge outperformance of growth sectors (most notably technology) over economically sensitive value sectors (energy, industrials, financials).

  • Political risk remains high and we expect increasing market focus and volatility in the lead up to the toxic US presidential election in November. Brexit, as ever, is a dark cloud hanging over UK assets.

  • Gold finally broke through the US$2,000/oz barrier last month before pulling back to US$1850/oz, illustrating its volatility. Oil is marking time around US$40/bl with little upside.

  • Government Bonds offer negligible yield and little prospect of capital growth but we still see opportunity in investment grade corporate bonds, with spreads giving a substantial yield pick-up whilst default risk remain low.

  • A tentative summer recovery in sterling has been reversed by adverse Brexit developments and it remains the weakest major currency this year. The US dollar is also coming under increased selling pressure.

  • The UK Commercial Property sector may see several daily dealt ‘bricks and mortar’ funds gradually re-open, though not M&G at this stage.

Winter is Coming

Summertime is over, literally and metaphorically. The ‘easy money’ from the market rebound has been made and we’ve now reached the difficult days that will test the confidence of the markets. A second wave of the pandemic, insipid economic recovery, renewed lockdown measures, over-reliance on policy support, rising global unemployment, the US election in November, Brexit, expensive looking valuations, and our old friend ‘unknown unknowns’ will all play their part in the ongoing narrative as we enter the long, dark, days of winter. Not the most cheerful of opening paragraphs I’ve ever written in truth but (spoiler alert) maybe the last paragraph of my conclusion will leave you in better heart.

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Conclusion: Challenges, challenges…

The author Philip Roth can be a difficult read sometimes but his novel The Plot Against America about anti-Semitism in the US in the 1940s was recently and memorably televised and well worth a watch as the evenings draw in and entertainment remains at a premium. Roth describes history as being the ‘relentlessly unforeseen’ and that has been the story of our lives this year. You will have noticed I included a few question marks in my sector headings and you can quite rightly say I should be giving you answers not questions. However, coupling Roth’s description of history with Voltaire’s dictum ‘doubt is not a pleasant condition but certainty is absurd’ will give you the strong message that we are flying in foggy skies for the foreseeable future with too many unknowns about the spread of the pandemic and the effect it will ultimately have on the global economy.

Consequently, be prepared for market volatility with some sharp falls, but my 40-year career in financial markets has taught me one thing above all others, that it pays to be optimistic. Financial Analytics would only produce data for me back to 1986 when I was already climbing the slippery pole but £10,000 invested in the FTSE All-Share back then would be worth £180,000 today, double if I’d gone crazy and invested it in the S&P500. And along the way, we’ve navigated the 1987 crash, 2000 dot.com bust, 2008 GFC and this year’s pandemic. The lesson learned is to travel hopefully and accept the turbulence along the way because you always end up in the sunshine eventually.

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