Jonathan Marriott, Chief Investment Officer
The COVID-19 pandemic continues to dominate investment markets. The third quarter saw a continuation of the recovery for equities as lockdown measures were lifted and people returned to work, looking ahead to a degree of normalisation. However, in September a second wave of infections caused something of a setback. Despite this correction it was, on balance, a positive quarter for equities. Investors continue to balance the economic damage against the massive fiscal and monetary economic stimulus that has been provided by governments and central banks. While the pandemic has dominated our thoughts, the US election campaign has been heating up and Brexit negotiations continued without much progress.
The pandemic has now resulted in over a million deaths around the world, a disaster on a scale that is hard to comprehend. Huge economic damage has been done by measures taken to try and halt the spread of the disease. There are signs that survival rates are getting better and progress is being made on developing a vaccine, however, there is no certainty about when a viable one may be approved. The restrictions in the UK were lifted in the middle of the year and we saw signs of an economic recovery, but this has been called into question by the second wave of infections as the summer ended. In the end, a sustained recovery in economic growth may depend on the development of an effective vaccine.
At the start of the quarter, the European Union agreed a Euro 750 billion recovery programme to be deployed next year. However, by the end of the quarter, they continue to debate the details and it appears that implementation may be delayed. Democrats and Republicans in the US have been battling over the next stimulus package as support schemes have wound down. The US election is showing up the bitter divisions in the US electorate and the presidential debate was chaotic. A deal on the new stimulus may yet be delayed until after the election, although there seems to renewed urgency to deliver some support at the end of the quarter. While Joe Biden leads in the polls, we cannot write off the chance of Donald Trump winning. The incumbent may not accept defeat and is likely to dispute the postal ballots all the way to the Supreme Court.
Central Banks continue to keep rates low, support credit markets and provide loans to support the economy. The big change here was that the Federal Reserve will now target an average inflation rate of 2% which, after a long period below target, would allow them to keep rates lower for longer even if inflation exceeds 2% for a time. The European Central Bank may consider following this example. In the UK, the Bank of England has hinted at taking rates negative. Overall, low interest rates are likely to remain in place for a very long time.
Post-Brexit trade negotiations have continued with the "last round" starting at the end of the quarter. It is hard to see that there has been any progress and the UK Government has put forward a bill that appears to go against some of the terms of the exit agreement. Further negotiations will be needed to get a deal which is in everyone's interests, but at present it looks as if the transition deal will end without a new trade agreement.
Dispersion within markets and sectors has been and is likely to remain high. Companies with stable or growing earnings have performed well; meanwhile others have been severely impacted and may not recover from the pandemic damage. The US election and the balancing act between pandemic and stimulus will no doubt add to market volatility for the rest of the year. We encourage investors to look through the day to day noise and believe equities will find long term support from long term low interest rates. However, a selective approach remains key to positive returns.
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