• Ashburton Global Multi Asset Funds continued to gain ground over the third quarter, building on the markets’ rebound from the second quarter, although eased back in September.
• As growing fears of a second wave of COVID-19 infections rose, equity markets gave back some of their recent gains, with the FTSE All World Equity index falling some -3.5% in September.
• Technology issues saw profit taking, led by US names, whilst fears of further oversupply due to demand cutbacks in the oil markets saw the energy sector hit by renewed selling pressure.
• Fixed income markets moved sideways, although credit sensitive issues such as high yield came under pressure.
• Latest commentary from the Federal Reserve suggests continued monetary policy support, and new measures of tolerating average inflation targeting, which supports reaffirmation that interest rates will remain low until 2023.
While, on the surface, equity market returns over the third quarter appear more than satisfactory, the journey to this point has been by no means comfortable. The month of September provided a reminder that confidence is fragile, as global equity markets eased back some -3.5%, from all-time highs achieved towards the beginning of the month. Growing fears of a second wave of infection which we are currently witnessing across the world, ahead of any real vaccine success to the COVID-19 , indicates that a further slowing in GDP growth could well be around the corner, as isolated lockdowns take their toll. Whilst encouraging soundbites on a prospective vaccine have been made, this still appears most likely to be next year at the earliest.
As the markets consolidated, many of the technology and communications stocks which have been running fast this year saw profit taking kick in. The energy sector however was particularly hard hit on further oversupply fears, as any reduction in demand due to further COVID-19 impacts on economic growth may inhibit any recovery in this sector. OPEC meetings are due to address this in October, but little action to curtail supply is expected and with Libya now increasing production and more able to export oil onto world markets.
Something of a reversal in the trend away from government bonds was seen over the month, as the FTSE World Government Bond Index saw greater support, with European issues leading, whilst poorer quality credit saw some profit taking in sympathy with broader equity markets. US high yield credit in particular saw the brunt of the pullback as investors rotated away from this more economically exposed segment of the credit space.
The US Federal Reserve’s (the Fed), continued expansionary monetary policy even in the face of potential inflation, foreshadowed at the Jackson Hole meeting, and was reaffirmed with the Fed retaining zero interest rates and forecasting them to remain at this level until at least 2023. The Fed chairman highlighted the need for fiscal measures to support the US economy. Optimism over such a fiscal package triggered a late month end equity rally. European Central Bank’s (ECB) president, Christine Lagarde, indicated at the end of the month that the ECB will follow suit in allowing inflation to rise unchecked for a period without raising interest rates.
Whilst more recently we have marginally increased our equity weightings, we are continuing with a relatively neutral to positive equity position, ahead of the US election on 3 November. Our preference is for the Asian markets where a recovery has appeared earlier given their more advanced stage in the COVID-19 crisis, and where valuations remain attractive on a relative basis.
We are still supportive of a large weighting towards the US markets through quality biased investments. We do believe however that the US election may bring a greater level of uncertainty to investors and of some concern is that the outcome may be contested, which could well lead to delays in policy and further fiscal stimulus measure being followed through. We have remained underweight in European equity markets, although appreciate that pockets of value are appearing here.
There is no disputing that relative to history, equity market multiples are high. Though there is still some way to go to reverse the COVID lockdown induced economic damage, on an overall basis we continue to forecast economic improvement from the currently depressed levels. While monetary policy remains so lax, even in the face of inflationary pressures as economies unlock, it is difficult to see how other asset classes can deliver real returns. Corporates tend to be relatively well shielded from inflationary pressures given their abilities to pass on price rises. Catalysts for economic recovery may come from vaccine announcements or from fiscal stimulus.
We are aware that risks remain somewhat elevated, recognising concerns such as the success or failure of COVID vaccine trial outcomes, the upcoming US election, the continuation of US/China trade discussions, not to mention growing fiscal concerns. However, we have strategically counterbalanced some of these risks by increasing our gold and inflation linked sovereign assets. These holdings also position us to our view that the US dollar on a medium-term basis is overvalued, despite being a safe haven currency. We believe that capital will increasingly seek out positions in non-dollar assets as risk levels subside. Our Japanese yen positions remain unhedged as a result.
Our Global Multi Asset Funds consolidated in line with expectations given the market pullback, with the Global Growth Fund falling by some -1.6% on the month, in line with its peer group.
The Global Defensive Fund was down -0.6%, while USD Global Balanced was also down – 0.7%. The Sterling Asset Management Fund (GBP base) fell -0.6%.