Market and Economic review for week ending 16 October 2020
Current tactical positioning
The portfolio managers have added small exposures to Asia ex-Japan and US equity on a tactical basis from neutral. We are of the view that markets will continue to place more weight on stimulus introduced than on any worsening of Covid-19 cases. A small UK REITs position is held across all the LF Prudential Risk Managed Active and Passive portfolios as valuations continue to look attractive.
Market and Economic review
Another week of Brexit headlines dominated the UK press, with Boris self-imposing a deadline of 15th October where he would walk away from negotiations unless he felt there was meaningful progress. This uncertainty caused volatility in UK markets where the FTSE 100 has underperformed its peers. He subsequently backtracked by Wednesday and although some losses have retraced, the damage was done. It was a relatively quiet week on macro data releases, but the theme of Covid-19 and its economic impact is still playing out. With an autumnal chill in the air, the second wave of infection is affecting Europe with spikes in cases, hospitalisations, and deaths across the continent. The Czech Republic imposed a three-week partial lockdown shutting schools, restaurants, bars, and clubs. Public consumption of alcohol is also banned. The country has the highest new infection rate per 100,000 people in Europe. In the Netherlands and France, partial lockdowns and curfews were also announced. In Spain, politics are impeding a second Madrid lockdown, where city officials are refusing to follow Spanish authority guidelines on lockdown measures, resulting in a 15 day state of emergency. Fatigue seems to be setting in and this is something to watch.
Fortunately, the rate of deaths globally is currently lower than in March, perhaps due to better therapeutic treatment as well as rapid action by governments in instigating local lockdown measures: the UK introduced a 3 tier restriction system across the country this week. MAPM continue with the view that lockdowns won’t be as harsh as March and although the measures introduced by various governments currently are noteworthy, current information appears to verify our view.
The second wave has led to a marked reduction in a key European sentiment reading, the ZEW index, which coming in at 52.3 for the month of October was meaningfully lower than the 73.9 reading in September; the lowest reading since May. This contrasts with positive sentiment in the US, where its small business optimism survey had a September reading of 104, growing from 100.2 in August, although the more narrowly focused New York Empire manufacturing survey showed a weakening in its’ October survey, with a reading of 10.5 versus the September reading of 17. Chinese import and car sales numbers also reflect similar positivity where its’ consumers bought cars at a rate 12.8% higher than a year ago and imports were 13.2% year on year versus estimates of -2.1%. After its’ valiant efforts in the spring, Europe seems to be squeezed in the middle of not being dictatorial enough to snuff out the virus as China has through its’ harsh lockdown measures, or being relatively relaxed in control measures in the US, where it had a lighter touch in regulating business activity. The lower equity returns in Europe versus US and Asia this week may also be reflecting this narrative.
The US election is less than a month away and Joe Biden is seemingly comfortably ahead in various polls. Notwithstanding Trump’s victory in 2016 where pollsters got predictions wrong, the lead Biden has over Trump could accommodate a margin of error in polls that Hillary Clinton didn’t have the luxury of in 2016. The BBC’s lead US political journalist Katty Kay envisages one of three outcomes: a Biden landslide, a marginal Biden victory or a marginal Trump victory. Probabilities therefore lean towards a Biden presidency, however, the manner of the win would determine the speed and size fiscal stimulus measure markets seem to be focusing on. A Biden landslide would imply a large package and the earliest feasible date of injecting this stimulus into the economy is the end of January 2021. If Biden (or Trump) do not control both houses after the election, then the implementation date may be pushed back and the overall package may be smaller than hoped. As highlighted last week, the gap between the election and inauguration is where markets could suffer, due to the potential backlash of the losing party contesting the election and fringes of the left and right wing populace possibly pursuing a path of unrest.
Macro data continues to suggest the continuation of a jumpy but positive trend and the likelihood of a more certain US election outcome is incrementally more positive on balance (based on the information we have). We also think that the prospect of a larger stimulus package (most likely after the election) is now more probable on balance. We are aware of the risk to these views, particularly since elections are hard to predict and due to the likely uncertainty stemming from a contested election outcome. We are of the view that markets will continue to place more weight on stimulus introduced than on any worsening of Covid-19 cases. Our view has therefore become marginally more positive on risk assets, and we await further developments both on the US election and stimulus package which we feel are the key variables.