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Markets continued to open up overall over the Q3 period, with companies starting to gain earnings traction although not to the levels prior to COVID. The Central Banks and governments globally remain supportive of markets, and there is continued talk on further support from both should there be further problems as a result of pandemic restrictions.
We’ll continue to provide our clients and prospects with views on the marketplace, and hope you find our commentary below informative and interesting.
The economic picture was mixed with some areas showing an expansion in manufacturing and services continuing from the recovery in Q2. Yet, at the same time, in other areas an uptick in unemployment and slowing growth gave rise for concern. There continues to be ongoing trade talks with the US/China and the result of the upcoming US Election could alter the approach on either side. We remain careful not to second-guess politicians but remain focused on the fundamentals at both sector and company level in the funds held within the portfolios.
Over the quarter the top performing geographic areas have been the Asian region with the MSCI All Countries World Index (Ex Japan) up 5.8% as both companies and consumers have returned to a level of normality. In the West there continues to be a mixed picture with the FTSE All Share down 2.9% and Europe marginally ahead. As Brexit talks continue, greater clarity may allow the UK to appreciate more fully.
Within fixed income, returns in corporate bonds remained positive relative to Government Bonds. The IBoxx UK Corporate Bond index rose by 1.5% over the period. While the Barclays Global High Yield index fell by 0.4% and the Iboxx UK Gilt All Maturities fell by 1.3%.
In other assets, most property funds remain suspended but there has been some development with some property valuers removing the material valuation uncertainty clause on valuations. This had been in place as valuers were unable to provide an accurate valuation in many areas.
|Equity & Fixed Income Market Returns||3m||6m||1yr||3yr||5yr|
|FTSE All Share||-2.9||6.9||-16.7||-9.3||18.5|
|MSCI Europe ex UK||1.2||19.5||-0.5||6.7||55.5|
|Japan – Topix||2.6||14.6||2.0||14.1||68.7|
|MSCI AC Asia ex Japan Equities||5.8||25.0||11.9||18.0||87.0|
|MSCI Emerging Market Equities||4.7||24.1||5.4||11.5||80.0|
|IBoxx UK Gilts – All Maturities||-1.3||1.2||3.7||19.1||29.8|
|IBoxx UK Corporate Grade Bonds||1.5||10.7||4.3||15.8||34.5|
|Barclays Global High Yield Bonds||-0.4||12.2||-1.9||12.4||57.4|
Total Return (£), Cumulative | Source: Financial Express Analytics 30/09/2020
Within Equity markets there was a divergence over the quarter with Asia and the US appreciating in value above the UK and Europe. The greater predominance of technology and, in part, the greater pace of recovery has led to this divergence.
Both governments and central banks globally have continued to provide a level of support, but some of the job support packages may end without a replacement, which is giving concern. In the UK, a Job Support Scheme will replace the furlough scheme as the Government keeps an eye on unemployment levels and the increasing costs of the projects.
US markets gained in Q3 with the S&P 500 index rising by 4% as the economy continued to recover from Q1. The FED continued to remain supportive of markets with a view to keeping rates low until potentially 2023. The more consumer facing sectors benefited from increased discretionary spending on food and leisure.
In Europe, markets again had a positive quarter with the MSCI Europe ex UK index rising by 1.20% as lockdown measures started to ease and there was further central bank easing. In addition, a €750bn recovery fund was agreed by the group to aid the weaker countries in the crisis.
In the UK, markets were slightly negative as the performance of the oil and financial sectors remained poor. Uncertainty and concerns remain in relation to both the virus and further Brexit talks nearing their deadline without any resolution. The dispersion of returns favoured the mid and small cap companies as valuations began to reflect the more encouraging economic data across the domestic economy.
In Asia, markets appreciated as China’s domestic economy continued to show signs of recovery alongside a bigger fiscal support package from the Government. Other parts of Asia have continued to support markets through interest rate cuts and further stimulus support. Overall the easing of global lockdown is starting to help with investor sentiment and support for some of the more export led countries.
Throughout the quarter there was a divergence in performance on both a geographic and sector basis. Higher growth areas such as IT, Consumer Services and Consumer Discretionary outperformed on average relative to the more undervalued areas such as financials and energy companies. This is a theme that has been happening all year, which has opened up some good longer term buying opportunities in the more undervalued areas of the markets. Careful analysis of the sectors and companies remains key within the portfolios.
The performance of the MSCI ACWI Growth & MSCI ACWI Value Indexes over the quarter
Source: Financial Express Analytics 30/09/2020
Central Banks have continued to loosen monetary policy by decreasing interest rates to help the economy through this period. The FED kept rates at 0.25% over the quarter and indicated to the markets that rates could be at these levels until 2023. In addition to providing further monetary support, the FED Chairman suggested that a combination of both Government and Central Bank support remains key to opening up the broader economy. The FED also adjusted their inflation target to allow for temporary overshooting of the inflationary target.
The UK maintained rates at 0.1% and continued its bond purchasing program by a further £100 billion to take the total asset purchases to £745 billion. The policymakers have commented on the domestic economic data being a little stronger than expected, although the outlook remains uncertain due to the coronavirus and Brexit developments. Inflation expectations remain low for the foreseeable future and further support may come should it be felt appropriate and necessary.
The yield on UK 10 year government debt increased over the quarter from 0.17% to 0.23% with capital prices decreasing. Investors have looked to the corporate debt markets to provide a higher level of income, which has resulted in yield reducing yet still offering some value on a relative basis to gilts.
The European Central Bank left rates unchanged at 0% while increasing its asset purchase program by a further €600 billion, its total now stands at €1.35 trillion. This has been used to mitigate the impact of COVID and provide countries with extra room for fiscal policies. Over the final quarter, we anticipate that further monetary support may be given if required.
Looking at the investment outlook in the short-term, we continue to focus on fundamentals valuation. While there will be areas of the economy that will suffer through further restrictions, there will also be companies that have the flexibility to adjust to the changing of people behaviour.
We remain at the margin overweight equities favouring active managers who have been trimming and adding to positions when opportunities arise. In the fixed income allocation, the portfolios are positioned to favour the more defensive companies with strong cash flows to meet their debt repayments.
Our portfolios remain diversified across each asset class, sector and geography, and our approach has the flexibility to take advantage of the changes in the markets throughout this period.
This information is obtained from sources considered reliable, but its accuracy and completeness is not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitute financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance. Anderson Strathern Asset Management Limited is authorised and regulated by the Financial Conduct Authority.