Growing caution

This year has been a testing one for investors, and the third quarter of 2020 was no different. Although the summer began with an optimistic mood in certain markets, as the quarter ended that mood was giving way to a sense of caution. 

Equity markets around the world have recovered many of their losses since March, thanks to support from central banks, and some have even surpassed their pre-pandemic levels. And in the third quarter that trend continued; the MSCI World index of large global companies is higher than it was at the start of the quarter. Yet a degree of greater uncertainty has re-emerged in the past few weeks, for three reasons. 

Firstly, data are suggesting that the economic recovery for most countries will be lengthy and uncertain. Instead of the V-shaped recovery that many were hoping for, it looks like lots of economies will be grappling with the effects of COVID-19 for longer than had been anticipated. However, an exception to this trend can be seen in China, where both the economic recovery and the suppression of COVID-19 appear to be going well. 

Second, growing case numbers of COVID-19 infections in many countries have led to concerns about a second wave. Although global lockdown measures managed to halt the spread of the virus in the spring, recorded case numbers in the past few weeks have begun to rise steadily. A spike in the numbers of COVID-19 infections is a risk to businesses, to jobs, and to markets. The UK was harshly reminded of that fact at the end of September, as new lockdown rules were announced in response to rising infections, and the government pivoted from encouraging people to return to work to urging that they stay at home.  

And finally, some investors are hoping for further interventions by governments and central banks. Although unprecedented levels of fiscal and monetary stimulus have supported markets throughout the year, there is a sense that investors are hoping for more. When a recent announcement by the Federal Reserve didn’t commit to boosting its bond-buying programme, for example, investors voiced disappointment, and the S&P 500 stock index lagged on the news. 

A particularly striking feature of the market recovery in the last quarter has been the performance of the large technology companies. These corporate beneficiaries of COVID-19 have enjoyed strong earnings thanks to changing working and shopping habits, as well as people spending more time online in general. The share prices of many of these companies have surged, but were pegged back by a sell-off in September that seems to have been prompted by investors ‘locking-in’ their recent gains. The long-term potential of the technology sector seems very much intact. 

Even though the world’s response to COVID-19 has been the single biggest driver of markets this quarter, there are several other important forces. The US election is just around the corner, and while the outcome of that contest is not inherently positive or negative for investors, its approach has led to ups and downs in the market. One short-term consequence of the febrile atmosphere in Washington is that it’s made it harder for Democrats and Republicans to agree on the next round of fiscal stimulus, the absence of which is weighing on the American economy. Another risk is the potential for a contested result, which was hinted at by the President in some of his recent remarks. 

Meanwhile, the deadline for a post-Brexit trade deal between the EU and the UK is almost upon us. Little progress seems to have been made during the quarter, and the lack of a deal has weighed on the value of sterling and UK stocks. 

Finally, the trading relationship between the world’s two largest economies continues to unsettle investors. During the last three months there have been several flashpoints: the closure of consulates in both countries, tensions over Hong Kong, and sweeping restrictions on Chinese social media apps in the US. 

So, there is plenty for investors to think about, and markets face several headwinds in the next few months. But it’s also worth reminding ourselves of the recovery in markets that has continued this quarter since their March lows. Recent events have taken the edge off some of the ebullience that was growing over the summer, but that’s unsurprising given the context of COVID-19. Markets and economies continue to benefit from the support they’ve received from central banks and government spending. Investors should remember what an extraordinary year this has been, and continue to focus on their long-term goals. 

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein.  The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products.  This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.