Further to our previous updates please find below our latest commentary on the continued impacts of the Covid-19 virus on the investment markets and the wider economy, as of Wednesday 23rd September. . We will continue to provide regular information and further observations to help support our clients
Article written by Iain Lightfoot, Joint MD Financial Planning and Wealth Management and Richard Cole, Fund Manager at Future Money Ltd.
A bumpy start to the week for stock markets as Covid-19 finds its feet again in the UK. Monday saw losses of over 3% on the FTSE 100 as a public address by the Chief Scientific Officer and Chief Medical Officer provided a dire warning for the path of the disease, while the promise of further restrictions from No. 10 sparked fears for our fledgling economic recovery. However, with the restrictions now spelled out and with the feeling that they are not as onerous as feared, markets have staged a significant (but not complete) recovery today (Wednesday 23rd September). Such large swings may feel relatively normal in current conditions, but in a pre-Covid era they would have been considered as extraordinary. Such volatility is likely to persist while the path of the virus has such a hold on the fate of our economy and therefore, while days like Monday may be highly uncomfortable for investors, the sharp recovery of Wednesday displays the risk of any kneejerk selling that may have seemed tempting.
Following a surge in activity during the summer, the UK economy is now set to face a particularly challenging autumn. While consumer spending jumped in July and August, September shows reduced enthusiasm. With the Eat Out to Help Out scheme now expired and with furlough approaching its end, there is the potential for a further slump in consumer confidence, especially once you consider the likely dampening effect on the economy of the latest government restrictions.
Given such challenges, it seems likely that more support packages will be forthcoming. No official announcements have yet been made, but there is mounting pressure for an additional leg of furlough to be launched or for those sectors particularly hard hit to be supported. In addition, there is also significant room for the Bank of England to add more stimulus. While the base rate is at the historic low of 0.1%, and the new Governor recently announced that negative interest rates are not currently planned, he did confirm that the policy is in the tool bag, suggesting the option remains open. Additionally, as a (marginally) more conventional option, there is also the potential for further bouts of Quantitative Easing as a route to shoring up the economy.
While policymakers are loathed to add to the country’s already burgeoning debt pile, faced with the prospect of escalating unemployment and collapsing growth, it appears likely that the Government and the Bank will ride to the rescue, should the need demand it.
On Tuesday 3rd November, Americans will head to the polls to decide whether Donald Trump or Joe Biden will lead the world’s largest economy for the next four years. Mr Biden currently holds a significant lead, but Mr Trump is closing the gap. Markets so far appear fairly ambivalent to who next occupies The White House. Traditionally a Republican President would be favoured to a Democrat by markets, given a more business friendly environment assumed from the former. This holds true to some extent currently, but contrasting factors count this time around. The unpredictable and dramatic action Mr Trump favours has been at times unsettling to investors, while Mr Biden as a moderate is considered relatively business friendly. Economic support following Covid-19 is likely to remain significant under either candidate, while a firm stance on China is also likely to remain in either case. As such, there does not currently appear to be signs of big market swings come the results day. Nonetheless, developments in the campaign should be watched carefully for significant developments, as the trajectory of the US and its actions will remain important factors for the global economy.
In this election campaign, Mr Biden is attempting to keep the focus on Mr Trump’s handling of the pandemic and its economic implications. So far this strategy is working, given the lead Mr Biden currently enjoys. Mr Trump, on the other hand, is attempting to steer the narrative to any other feasible patch, whether that be on ‘Law on Order’, or, as has developed in recent days, on the now vacant seat on the US Supreme Court, after the death of Ruth Bader Ginsburg. Mr Biden has so far refused to enter this debate for fear that it will change his narrative and given that any response he offers has the potential to alienate target voters, whether that be the democratic base to his left or the undecided voters to his right. The Supreme Court battle, therefore, has the potential to be either a rallying cry for his supporters or a bigger stick for his opponents to use against him; the likely outcome is hard to judge. Added uncertainty is how to sum up the situation, and given how he has been leading in opinion polls, that is unlikely to be welcomed by Mr Biden and his strategists.
Keeping our attention stateside and a further factor that could impact the Presidential election is the progress of a Covid-19 vaccine. Mr Trump continues to build expectations that a vaccine will be approved for use prior to the election; but, fearful of public trust being undermined in any eventual vaccine, US regulators appear to be firming up the standards they expect drug companies to meet. Reports suggest that researches will have to wait for more cases of severe disease to develop amongst control groups, in order to ensure that the vaccine is properly tested against those most vulnerable. The expectation is that these higher standards, if enforced, will make the approval of any vaccine extremely difficult by early November. While trying to keep vaccine discussions away from politics, the regulators will likely be benefiting Joe Biden if this higher bar is made official.
Our view is that market conditions will remain fearful in the short term, however, there will come a point when sentiment will turn. When this will occur still remains uncertain, but the time of growth will come again. We believe that over the medium term we can expect a reasonable recovery in terms of economic activity and stock market levels.
Our philosophy is that no one can predict the peaks and troughs of financial markets with any accuracy and it has always been extraordinarily difficult to time when the best (peaks) and worst (troughs) are. Timing the stock market is extremely difficult, so we believe it is best avoided. Volatility is a part of investing which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets. Taking a multi-asset approach means that some assets can fair better in different market conditions as they are more defensive assets such as bonds, whereas during periods of growth equities tend to fair better.
Armstrong Watson, in addition to our full range of accountancy services, also have access to fund management expertise from the Future Money asset management team, as well as independent expertise from the wider market. We are able to use this to help provide insight, commentary, advice and support to our financial planning and wealth management clients.
At the current time we continue to believe the appropriate course of action for most clients is patience. Other clients also continue to see this as an opportunity, with equities clearly still lower priced than they were at the start of the year, however, our philosophy remains that it is time in the market not timing the market, which is usually the best approach.
We also believe that for those people who are considering taking financial advice that now would be a good time to do so, whilst we know the current tax allowances, reliefs and opportunities that remain fully available for those in a position to utilise them.
Please note that the contents are based on the author’s opinion and are not intended as investment advice. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested.
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