Nervous times...

Market report

Nerves returned to capital markets this week as surging virus cases prompted policy makers to increase restrictions again across Europe. The prospects for another round of lockdowns was part of the story driving global stocks towards their worst week since March. Other risk assets, such as high yield bonds, were a little more sanguine. There seemed to be few hiding places with gold prices swooning in tandem with stocks and government bonds rallying only modestly for the most part. 

CIO report

For whatever reasons Europe and the US have struggled to replicate the success of many Asian economies at combating this latest coronavirus. As the shutters again come down on large parts of the European economy, investors have spent much of the week trying to incorporate the potential damage into market prices.

This is obviously not a simple exercise of taking the first half hit and repeating it in forecasts. It may not feel like it sometimes, but the world is significantly further along in its battle with this latest coronavirus. Treatments have progressed and viable vaccines are apparently closer. The timetable for the latter does seem to have slipped a little from some of the very sunny estimates over the late summer. Nonetheless, we do expect news from Phase 3 trials from three of the contenders in the next week or so.

Also, importantly, we know more about the policy maker response than we did at the beginning of the year – the notion of them being out of bullets is no longer an abyss for investors to gaze into. Meanwhile, policy makers themselves have a better idea of which areas of the economy will need most support and how to get it there.

None of this should be seen as an attempt to sugar coat what lies ahead. This has long expected to be a tough winter for much of the world. This coronavirus is still significantly more fatal than the more seasonal brethren it has joined. There is also not a simple trade-off between public health and the economy. Lockdowns inflict many shades of suffering. However, from the often cold-hearted perspective of investments, we need to keep in mind the notion of market efficiency. Most of what we know, fear and hope about the present and near future is likely already reasonably effectively incorporated into market prices. We have a team dedicated to scouring the world for opportunities where they may not be, but that remember is a full-time occupation. It is a hunt for extra basis points of performance played by thousands of full-time investors worldwide. It is a very competitive field.

We do not currently see a tactical opportunity in equities. We are still leaning moderately towards high yield and emerging market debt in our tactical portfolio, giving us more contained exposure to the uneven global economic recovery that lies ahead. Within this same portfolio we remain very wary of the risk reward trade-off on offer in the government bond space. Return-free risk seems the more likely proposition. This market bears watching closely over the next week. With what many describe as the most consequential US election in living memory lying ahead, it may be the US Treasury market that tells us before the networks where the executive and legislative power is heading on election night. The so-called ‘Blue Wave’ (Democrats winning the Presidency, Senate and retaining the House of Representatives) would likely come with expectations of significantly more deficit spending than some of the alternatives for example. Rising bond yields would maybe signal investors trying to price such an eventuality in.

More broadly, remember that the rewards from successfully trading the short-term incentives and disincentives on offer tend to be a small part of what the act of investing is about. Mostly, it is about waiting patiently in sensibly diversified fashion for whatever innovation and ingenuity humankind can muster to flow through to corporate profits. We have a claim on those profits as soon as we take the plunge and decide to invest. There can, of course, be no guarantees here, but history (both recent and distant) gives us good cause for optimism.

That entirely rational optimism should not be allowed to spill over into focusing on one particular vision of the future nonetheless. The lesson from the last few years is surely not that the planet is awash with credible soothsayers. As ever, this comes with best wishes from the team to you and all of your families and loved ones.

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*This article is for information purposes only. It is not intended as a product offer or investment advice.