Quarterly update: A recovery for all seasons

Brace yourselves. Second wave woes and renewed lockdown measures mean tricky times ahead for investors as the economy once again slows. But we believe the bigger picture still looks good and remain positioned for growth over the longer term.

Solid summer growth gives way to second wave worries

Global economic activity picked up over the summer as lockdown restrictions relaxed. Consumer spending increased and businesses became cautiously optimistic, with key economic indicators turning positive.

Then many regions, including the UK, reintroduced measures to slow an increasing coronavirus infection rate towards the end of the quarter, and we saw noticeable falls in some markets.

Economic conditions are likely to be more challenging over the rest of the year, but the longer-term outlook remains positive in our view, largely thanks to the ongoing support from governments and central banks.

We believe the global economy will pick up speed next spring and that eventually a medical solution to the COVID-19 pandemic will be found. Accordingly, we increased our allocation to equities in July to reflect our confidence.

We’ve also added a position in gold over the quarter, as an alternative to some government bond holdings. We think gold offers more attractive medium-term returns than government bonds, where yields are at record lows, as well as some protection against inflationary pressures.

Tech: The rise (and fall) of the machines

Alan Higgins, UK Chief Investment Officer at Coutts, says the market was overdue a correction after rallying strongly since the spring.

He adds, “Given the economic recovery and substantial monetary and fiscal stimulus, we see current levels as more of a buying opportunity with a low probability of the market revisiting the lows of March.”

Accordingly, many markets saw a retreat in September.

Tech stocks fell sharply early in that month, dragging the tech-heavy US indices with them – we saw the worst trading period for the S&P 500 since mid-March.

But before the deep drop, share prices in the tech sector had soared far ahead of the rest of the market, pushing leading US indices to record highs. These businesses have been the notable winners from the pandemic as more of our lives move online. The sell-off seems to have been triggered by speculative investors reducing their investments to take profit and diversify into other areas.

Despite this, we believe the long-term case for investing in technology companies remains. They are the driving force behind the trends changing the way we live and work, including the shift towards homeworking in the wake of the first lockdown. We expect the sector to regain its composure as investors refocus on its long-term, attractive prospects.

THE RETURN OF BREXIT UNCERTAINTY

The UK government proposed a unilateral change to parts of the Brexit withdrawal agreement, raising the stakes in the already-strained negotiations. The ongoing uncertainty caused sterling to weaken.

Brexit friction also contributed to the FTSE 100 underperforming, but its composition is the main reason. Tech stocks have been the outstanding performers of the year – September’s retreat notwithstanding – but the FTSE 100 had just 1.4% exposure as at 30 June, compared with a 27.5% exposure for the S&P 500. In contrast, a high exposure to energy companies (10.1% vs 2.8% in the S&P 500, as  at 30 June) has held performance back as the sector experienced a massive fall in demand over the first lockdown period.

While this impacted our own UK positions, weak sterling also boosted returns from our overseas equities – a good example of the benefits of diversification. Strong performance in Japan and emerging markets, two areas we like for equities, was given a further lift by the pound’s woes.

We still believe an agreement between the UK and EU is possible and there are good reasons for both sides to strike a deal. Any resolution is likely to relieve pressure on sterling and the UK’s stock markets.

America decides

The quarter came to an end with arguably the most chaotic US Presidential debate in the country’s history, as President Trump and Joe Biden took verbal pot shots at one another. Just a few days later, it was announced that Trump had contracted coronavirus. 

For our latest assessment of the candidates and their impact on the economy should they win, please see our recent article.

Cutting carbon from our portfolios and funds

All our investment activity, every decision, is underpinned by our push for a more sustainable future. We believe this is not just key to building a better world, it’s crucial to delivering long-term returns for our clients.

We set ourselves a target at the start of this year to reduce the carbon footprint of our portfolios and funds by 25% by the end of 2021. And we’re delighted to report that we’ve already surpassed that in the majority of our mandates – 18 months ahead of schedule.

We’ll be sharing more detail on the numbers and how we’ve achieved them in an upcoming insight article.

Market performance

Stock markets around the world rose over the quarter, with the MSCI All Countries World Index returning 6.9% in local currency terms.

Meanwhile, measures taken to support economies through the pandemic, such as low interest rates, and the popularity of perceived ‘safe-haven’ assets such as gold, drew investors away from government bonds. UK government bonds returned -1.3% over the quarter, and their American equivalent returned just 0.2%.

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.