Monthly Market Update – September

Rewriting Brexit and breaking the law in a ‘specific and limited’ way, Operation Moonshot, the rule of six and encouraging people to inform on their neighbours, 10pm curfews and fresh lockdowns: 2020 continues to be the gift that keeps on giving for headline writers, if not for large sections of the UK population.

Before this descends into one of those much-maligned Dettol advert rundowns of September’s woes, we should highlight encouraging short-term macro news in the UK, with GDP expanding 6.6% in July. This is the third consecutive month of growth and with August also expected to be positive, the country should exit recession this quarter, at least according to the technical definition. While the UK has recovered around half the output lost in the pandemic, however, GDP is still 11% lower than in February and there are growing concerns about a painful autumn and winter ahead, with rising job losses, renewed restrictions on people meeting up and calls to work from home, and the Brexit negotiations still facing an uncertain outcome.

Ongoing recession is therefore expected heading into 2021 but it looks increasingly selective. Policy will have to address the growing split between many white-collar professionals continuing to work at home and actually saving money as a result and the thousands of so-called ‘low-skilled’ jobs lost and people struggling to make ends meet – and the Jobs Support Scheme announced by the Chancellor is some indication of this, albeit limited in scope.

Overall, markets had a weaker September, with the US hit by a selloff in technology names (of which more later) and the UK by fears of a second lockdown and renewed concerns over Brexit.

To have every living former prime minister come out against a policy would give most people pause for thought; but, as recent months have shown, Boris Johnson is not most people. Nevertheless, he looks set to face an internal revolt on the back of attempts to override part of the EU Withdrawal Agreement, with the government’s conduct described by Tony Blair and John Major as ‘embarrassing the UK’ with legislation that is ‘irresponsible, wrong in principle and dangerous in practice’.

Johnson and his team insist this capacity to break the law (in that specific and limited way) is necessary in case of a no deal, which looks increasingly likely with the sides in deadlock – and stories about queues of lorries, borders in Kent and rising prices already starting to emerge. Politics often seems to reside in the land of the surreal these days, but the fact that the majority of the same MPs who settled on a vastly revised ‘oven-ready’ Withdrawal Agreement just a few months ago subsequently voted for the government to breach it is one for the ages.

As this situation risks deteriorating into the melee of Theresa’s May’s time at the helm, the country is clearly losing patience as it wants the government to take control of Covid-19: after confusion around the rule of six policy, a U-turn on people working from home and shaving an hour off pub opening hours hardly signals an iron grasp of a spiralling situation.

On the policy front, we saw announcements from the US Federal Reserve and Bank of England during September, with the former sending out what it called ‘strong and powerful guidance’ that interest rates will remain near zero until at least the end of 2023. The central bank also said it would not tighten policy until inflation has been ‘moderately above’ above 2% for some time, confirming plans to focus on employment and effectively run the economy hot until it is well into recovery mode. Meanwhile, the Bank of England remained dovish without doing that much, keeping its powder dry for a difficult period ahead, with measures including negative interest rates still on the table.

In other political news around the world, we saw Yoshihide Suga confirmed as Japan’s new prime minister, with his ‘Suganomics’ expected to leave the fundamentals of his predecessor’s Abenomics intact. Suga has been a close ally of Shinzo Abe, who chose to stand down due to ill health, but is expected to bring a greater focus to Japan’s growth strategy backed by a so-called digital revolution.

As we look to the end of 2020 and into next year, there remains huge uncertainty about Covid-19, in terms of further waves, vaccines and the long-term effect on people’s lives. More fundamentally, however, we feel the investment backdrop, at least in the short term, will be dominated by the growing division between economic reality and stock market hope, largely when it comes to the US, and therefore maintain a wait and see approach for our portfolios.

Equities have always functioned as discounting mechanisms and looked beyond present conditions but the scale of the current dislocation calls into question exactly what markets are seeing differently, and this has largely been around US technology performance. For all the talk of fresh records for the S&P 500 last month, the US has effectively become a two-tier market, particularly post-Covid 19, with technology on the one hand and everything else on the other. Tech indices are four times ahead of the S&P this year and if you focus on just the 10 most-traded stocks, the so-called FANG +, this huge gap more than doubles.

In our recent presentations, we have included a chart titled Tech and the beanstalk to remind investors what happened to the giant in the story, crashing to earth from a great height. We have long been cautious on expensive US equities and this has only increased as the market leadership has narrowed. Recent selloffs in these giant tech names, while limited, give an indication of how sharp a correction could be, although views are mixed on whether there is enough leverage in the sector to burst the bubble permanently, particularly as the Nasdaq saw three drops of at least 17% in the 1997-99 period, only to emerge stronger and rise to the 2000 peak.

In the US, we are weeks away from the election, with both sides increasingly seeing victory by the other as some kind of existential threat. Adding his voice to the debate, former president Barack Obama recently advised Americans to ‘vote like your life depends on it – because it does’ and as wildfires continue to ravage the West coast, Covid numbers rise and the country falls further into civil war, it is hard to disagree.

Polling numbers suggest Joe Biden is in the lead but this will be little comfort after figures missed Trump’s traction with undecided voters and ‘white people without a college degree’ in 2016. The media is beginning to dissect policies in the wake of the first televised debate, particularly Biden’s plans to raise trillions in tax from America’s richest residents, as well as the revelation of ‘billionaire’ Trump’s $750 annual tax payments. The incumbent remains in ‘whatever it takes’ territory, claiming a key role in getting college football restarted after initially cancelling all games until the spring – a major fillip for the Mid-West region so important to his chances.

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice.