Macroeconomics
Global stock markets have soared following on from the bout of announcements from Pfizer and Moderna on the developments of a vaccine with a 94.5% efficacy rate. AstraZeneca have also announced positive developments in their much cheaper, more accessible vaccine being developed in partnership with Oxford University showing a 70% efficacy rate across all age groups. The announcements have lifted the mood across global markets, and some of the most deeply impacted sectors in particular. The FTSE 100 Index is up by 9% (as of 25/11/2020) since the initial announcement, while the US Dow Jones market hit record highs fuelled by optimism on the news. The Tech heavy Nasdaq Index lagged as investors rotated back into beaten up sectors such as leisure and travel. With the pace at which the vaccine developments are moving, it is possible that further announcements could have been made after the time of writing – which we expect to have further positive impacts on global markets.
Coupled with this news was the announcement Joe Biden won the U.S. Presidential Election. The outcome was welcomed by investors, with markets worldwide opening positively following on from the result. Republicans are expected to retain their current grip as majority in the Senate, likely to ensure continuity in tax, regulation and other policies. The sentiment we currently see factors in the reduction of economic uncertainty combined with better foreign relations. While Donald Trump continues to nurse defeat, he has now agreed that transition moves must commence, allowing Mr Biden to begin proceedings into the White house. It is inspiring to be able to communicate about markets making meaningful moves in a positive direction. The confirmation of Trump allowing transition to proceed provides us with some much-needed clarity, which has led to significant gains across our portfolios.
In the midst of this positivity, we should keep in mind the pandemic is far from over and cases are still sadly occurring. The vaccine will take some time to be manufactured and distributed. While we may need some of the other vaccines currently on trial to come through, the recent announcement gives a sense of seeing light at the end of the tunnel.
At the beginning of the quarter, the EU agreed to implement a recovery program worth €750 billion, to be deployed in 2021. Unfortunately, the plans behind the implementation of the package have become the topic of debate, which has led onto complications and likely to delay the implementation of the program.
Central banks continue to keep interest rates low in a mission to aid credit markets and provide loans to support businesses through the pandemic. The US Federal Reserve (Fed) has said it will now target an average inflation rate of 2%, which, after a long period below target, would allow them to keep interest rates lower for longer, even if inflation exceeds 2% for a period of time. The European Central Bank (ECB) may consider following this example and, in the UK, the Bank of England (BoE) has hinted at taking rates negative through sending a letter to the banks asking how well prepared they would be if negative interest rates were to come into play. Overall, we believe low interest rates are likely to remain in place for the foreseeable future.
Post-Brexit trade negotiations have continued with the “last round” starting at the end of the quarter. Unfortunately, it’s proving difficult to see any progress being made on the matter, and the UK Government has put forward a bill that appears to go against some of the terms of the exit agreement. There are further negotiations needed to get a deal which is in everyone’s interests and we will no doubt be hearing more about these in due course.
Overall, global equities gained over the last quarter, but as the chart above shows; different regions have experienced vastly different journeys over the period. With Asian markets being the leader during the period primarily fuelled by the recovery seen within China, closely followed by Emerging Markets. Western markets all went through a second drop fuelled by the second wave of coronavirus cases, however with the recent announcement we see a sharp recovery experienced in the western markets, with the steepest incline shown in the UK FTSE All share.
The information above further emphasises the importance of having a geographically diverse investment strategy. The chart below shows the FCFP Portfolios and how they have performed for the current year to date. The journey experienced is significantly smoother than the FTSE All share index, a testament to the portfolios’ diversification and the decisions being made by the underlying investment managers to limit excess volatility where possible as part of our investment planning services.
Looking ahead
Dispersion within markets and sectors has been, and is likely to remain, high. It has been the companies with stable or growing earnings which have performed well, meanwhile others have been severely impacted and potentially could not recover from the extensive damage caused by the pandemic. The US election and the balancing act between pandemic and stimulus will undoubtedly contribute to market volatility for the rest of the year. During these difficult times, we encourage our clients to look through the day-to-day noise and maintain the belief that equities will continue to find support from long-term low interest rates. It is important to bear in mind a selective approach remains key to positive returns which is why we continue to invest in our research and conduct regular contact with the underlying investment management team to make sure our client’s portfolios remain robust and appropriate.
As has been the case for several years, we continue to favour investment managers who pick companies with robust balance sheets in less economically sensitive areas. These companies have the ability to come out of the global crisis stronger, with fewer competitors, and able to use their surplus cash for tactical decisions leading to expansion.
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