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Keeping a cool head in the midst of volatility

16 October 2020

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Jonathan Marriott, Chief Investment Officer

In the weekly Brief on Friday 4th September we noted "there are a number of events that culminate around the end of October, which may give added impetus to short-term volatility in markets".  At that time, our view was that we should monitor events but investors should look through the short-term noise. As we enter this period it is right to review developments and confirm that our view of potential events is still valid. Six weeks on, the principal factors remain the same, a second wave of COVID-19, the US Election and Brexit. 

Following the relaxation of restrictions, a second wave of COVID-19 infections is hitting many parts of the world - particularly across Europe, including the UK, and the United States. Asia, except India, appears to be more disciplined and controls seem to have worked better there.  Restrictions so far have been more targeted than in the first wave. The second wave has, so far, hit younger people harder and the number of hospitalisations is lower. The survival rate is also higher, which may reflect the age of patients, as well as the advancement of treatments. However, it should be noted that some of the treatments received by President Trump are experimental and will not be widely available for many months.

Overall, while economic activity will be slowed again by these restrictions, the declines should be less than in the first round. Hopes remain high for a number of different vaccines in development, but it seems unlikely that these will be available for several months. Massive monetary and fiscal stimulus has protected employment and countered the worst effects of the pandemic. However, the European Union €750 billion recovery plan, which was agreed in principle, has been bogged down in negotiations over the detail and will be delayed. Meanwhile, US political infighting ahead of the election has so far left the next package of fiscal support in limbo for now. A significant package will be agreed but may have to wait until after the election.

Writing on a Friday morning, I have often been overtaken by events. Last week, I reported on President Trump pulling out of stimulus talks only to find that by the time the Brief was published he was making new proposals.  Markets don’t like uncertainty and his erratic behaviour can be hard to digest. In that respect, a more predictable Biden presidency would be welcome. At the moment, Biden leads in the national polls and in the key swing states, but Trump could still make a comeback. Last night, in place of the proposed virtual debate, both candidates took questions in a town hall meeting. Without interruption, Biden was able to talk policy and kept calm.  Trump appeared to be rattled by tough questioning that took him to task on the details of what he said. On balance, it still looks as if Biden will win and the Democrats may gain both houses of Congress. In this scenario, higher taxes may weigh on the market long-term but, in the short term, a bigger support package will be the focus. A less aggressive approach to trade negotiations and China would be welcome. Overall, a more predictable White House would be welcome. The biggest danger for markets would be a contested result, with Trump refusing to accept the postal ballots. This would be a temporary situation that would constrain markets short-term.

I fear to comment on Brexit in the middle of an EU summit and expect news on this over the weekend. The EU continues to talk of the UK having to make concessions while their position remains set in stone. The level playing field and fishing remain sticking points. Fishing is particularly important to President Macron of France who faces an election in 2022.  German Chancellor Merkel took a slightly more reconciliatory tone last night. Boris Johnson may pull the plug on talks or continue to try and get a deal. The deadline for getting a deal approved by year end is early November and we cannot rule out a last minute deal, which would be good for all parties. If the UK pulls out, the biggest impact would be in a falling pound which could support the international companies that make up the majority of FTSE 100 companies.

As we enter what we expect to be a period of high volatility, we will also be in the middle of the reporting season for US companies. These figures may reflect the recovery in the summer rather than the latest restrictions. We continue to believe that a selective approach to equity is appropriate as some companies will continue to be hit hard while others continue to flourish. Interest rates will remain low for a prolonged period and, in the long run, we expect equities will give investors the best opportunities. 

Six weeks ago, we predicted volatility at this time and suggested investors look through the noise. We still believe this is the right approach. Trying to trade daily moves in such unpredictable times can be a fool's game.

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