Confidence in fragile times

Dr James Cooke, Head of Global Equity Research points to the fragility of markets, highlights the need for a vaccine for economic recovery and suggests that there are few alternatives to invest in, other than equities.  

On the surface equity market returns over the third quarter of 2020 may appear more than satisfactory, yet the journey to this point has by no means been comfortable. October provided a reminder that confidence is fragile, as global markets continued to decline from all-time highs achieved towards the beginning of September. As COVID-19 infection rates around the world fuel growing fears of a second wave and economic shutdowns, indications are that a further slowing in GDP growth could well be around the corner before we see a recovery.

Although there is still some way to go to reverse the COVID-19 lockdown induced economic damage, we continue to forecast economic improvement from the currently depressed levels.

In the US, although we have a result confirmed with Biden as President, it seems likely that the Republican Party will control the Senate. This probably means that some of Biden’s more aggressive policies will be tempered and probably means that central banks will continue with easy monetary policy. This should be positive for equity markets. 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

To return to long run growth the world really needs to tackle the underlying cause of the recent economic woes. An effective vaccine is required. We anticipate results of three pharmaceutical company’s pivotal trials within the coming weeks and note Western government’s plans to roll these out are more advanced than people might think. Monday 9 November saw encouraging news from an interim analysis of Pfizer’s COVID-19 vaccine candidate. Approval of this may come before Christmas. The market was primed for such news and it has resulted in a rally in sectors hard-hit by lockdowns such as travel and high street retail. The “dash for trash” trade is likely fairly short term and we anticipate structurally challenged businesses will continue to struggle.

The COVID crisis accelerated a number of global secular trends which we expect to endure; E-commerce, increased hygiene and an increase in the use of data. We continue to seek reasonably priced quality companies by which we mean those with sustainable barriers to entry, generating economic profit, with strong balance sheets, and good shareholder treatment. These ingredients ought to continue to provide good risk adjusted returns.

For more information about our range of global equity funds and portfolios, search for 'Global Leaders Equity' or call 01534 512000 or email PortfolioManagement@ashburton.com.