As the third quarter drew to a close, the success of various countries around the world in containing the coronavirus pandemic was partially highlighted by stock market performance.  Asian equities returned over 10% and are the best performing region year to date.  Meanwhile UK equities fell 3% and are down 20% year to date.  European equities also lagged the rest of the world whereas US equities, although not supported by an economy where COVID-19 has been effectively supressed, continued to make good progress returning almost 9% over the quarter and over 5% year to date.

Asia’s strong performance was helped by China’s notable success in containing the virus.  Economic activity has recovered surprisingly strongly with major cities seeing a return to relative normality in contrast to many western cities, including in the UK where the Government recently advised on working from home again where possible.

Efforts to contain the virus continue to overshadow the economy, in the US the summer started with a sharp rise in the number of people in hospital with COVID-19 but since late July that number has declined sharply, perhaps helped by the increased use of face masks and social distancing.  In Europe and the UK hospitalisations remained very low for most of the summer but have started to creep up and Spain, France, and the UK are all seeing a rise in cases prompting concerns that lower temperatures in autumn/winter will see more hospitalisations and a rising number of deaths. Concerns over the rate of infections have seen restrictions introduced at local levels with national lockdowns being avoided due to the economic damage wrought.

Positive news on the development of an effective vaccine would be expected to result in a significant rally for many of the out of favour sectors and those markets, such as the UK, heavily exposed to them. There are some positive signs from trials, although the timeframe and ability of governments to conduct mass vaccination programmes is yet to become clear.

The outcome of next month’s US election remains uncertain although Joe Biden the Democratic challenger has maintained a healthy poll lead over President Trump. The race for the White House and control of the Senate has gained greater importance than usual in light of the pandemic and the recent inability of the Democratic controlled House and the Republican controlled Senate to agree on further fiscal stimulus support for those who have lost their jobs and struggling businesses. This has led to uncertainty on whether the US will pass further measures post-election which would have a substantial impact on both the US and global economy in the coming months.

In the UK, the effect of fiscal stimulus is fading with the newly announced job support scheme less generous than the furlough scheme which will be withdrawn at the end of October. A significant rise in unemployment is anticipated with around 10% of jobs remaining on furlough at the start of September. In Europe, support measures for workers affected by COVID-19 have been extended.

A further concern for investors in the UK is the lack of evident progress in the Brexit negotiations which weighed on sterling against major currencies in the third quarter. A limited free trade agreement with transition arrangements to ease the initial burden seems the most likely scenario for a deal to be reached but the prospect of no deal is influencing monetary policy in the UK with a move to negative interest rates a possibility in this scenario. The expectation is that global interest rates will remain lower for even longer than originally anticipated with inflation not an immediate concern.

The final quarter of 2020 looks set to be eventful, by January the outcome of the US election should be known, whether a no deal Brexit has been avoided and whether further stimulus measures have been passed by the US Congress.  There is also the likelihood of news on a vaccine.  Until these issues are resolved a diversified portfolio with an emphasis on quality for both equities and bonds is appropriate, a shift in sentiment could be rapid however and positive developments could see a rotation to out of favour areas of the market.

Market Performance

 

2020 Year to Date Total Returns
FTSE All-Share-18.77%
FTSE World ex-UK (GBP)+6.38%
FTSE Actuaries UK Conventional Gilt All Stocks+6.53%
FTSE Actuaries UK Index-Linked All Stocks+8.64%

 

Performance to 6 October 2020

 

Key Rates 
Bank of England Base Rate0.10%
Inflation (Retail Prices Index)*0.50%

 

 *September 2020