Posted: 10 / 11 / 2020
After huge falls in Q1 and the strong rebound in Q2, the third quarter was relatively subdued in comparison, while still showing a wide variety of returns across asset classes and regions.
Markets rallied or fell back on every bit of COVID 19 news, while central banks looked to reassure investors that they would do all they could to support economies around the world. Overall, the quarter ended with the MSCI world index up 3.2%.
A summer of recovery
In the UK, economic activity showed signs of recovery over the summer months, as many took advantage of the ‘Eat out to help out’ scheme to get some money flowing through the economy again. The second quarter GDP figures showed a 20.4% fall compared to Q1 but, within that figure, both May and June registered increases which look to have continued through the summer, with retail sales and PMI data all positive.
As the quarter came to an end, the government looked to tighten restrictions to try and control the spread of the virus, and workers were advised to work from home if they could. It’s too early to say what impact this will again have on the economy but expectations were managed that restrictions were likely to stay in place for six months, which at least gave some element of clarity. With the autumn budget cancelled, chancellor Rishi Sunak announced further support to try and protect jobs, with the unemployment rate so far contained by the furlough scheme. However, expectations are for a significant increase over the winter.
The FTSE Allshare Index was once again the laggard of major markets over the quarter, as its focus on old industries and fears as the Brexit deadline looms kept investors away from UK equities. Over the quarter, the index fell 2.9%; sterling was again volatile during the quarter, strengthening by 10% against the US dollar at one stage before ending the quarter up 4.8% against the US dollar, which held back overseas returns.
The bond market and interest rates
There was much less volatility in the bond market, as central bank intervention kept yields in check. However, during the quarter, a change in policy from the Federal Reserve in the US, where it announced a loosening of its inflation targeting, was matched by the Bank of England.
In the US, the big developments over the quarter were the marked shift from the Federal Reserve in its inflation policy. Having previously targeted an explicit 2% level, Jerome Powell announced that going forward it would target an average level of 2% and allow inflation to run higher than this level before considering interest rate hikes. This can be interpreted as interest rates staying at near 0 for a long period of time as the Federal Reserve tries to get inflation back in the system. Economically, the US announced its worst-ever GDP contraction for Q2, however, leading indicators such as retail sales and home sales beat expectations through the summer, giving hope that the US economy would bounce back strongly.
Europe started the quarter with the holiday season, with travel being allowed between EU countries without quarantine. This was positively received by investors with hopes that an uptick in economic activity would help protect businesses and jobs. After much discussion, the EU countries agreed to create a 750 billion euro recovery fund to boost GDP unproductivity, however, this was smaller than originally planned after five countries objected to the structure of grants versus loans. Furthermore, it was agreed that payments would only start in the second half of 2021, which may come too late for many businesses struggling to survive through a second wave of COVID-19. Over the quarter, the MSCI Europe ex UK index was up a little increasing by 1.2%.
The emerging and domestic markets
In Asia on the emerging markets, China was as ever at the forefront, with clear signs of recovering economic growth.
Second quarter GDP growth came in ahead of expectation at 11.5%, the strongest on record as the easing of lockdown restrictions was felt across the economy. The domestic market performed very strongly over the period, helped by technology-related companies that continued to drive the market higher.
India also began to show signs of improvement in August, with the manufacturing PMI breaking back through the key 50 level, indicating expansion. This was the first expansion since lockdown restrictions in March.
Brazil was another major country that showed strong signs of economic recovery, with three consecutive months of growth in manufacturing, and business confidence hitting a seven month high.
In Japan, news that Prime Minister Shinzo Abe was stepping down surprised investors and raised concerns as to whether his pro-market reform agenda would continue.