Guide to the Markets
Updated each quarter, the Guide to the Markets illustrates a comprehensive array of market and economic trends and statistics through compelling charts.
Key themes for Q4 2020
The summer months saw a rapid recovery in global activity as government restrictions were eased. A combination of pent-up demand and meaningful government transfers helped drive this initial V-shaped rebound (Guide to the Markets – UK pg 27, 36 & 42). The journey ahead looks more difficult. Ongoing social distancing and regional shutdowns are still likely to be required to contain the spread of the virus, until a more meaningful medical solution is available (pg 13 & 14). Fiscal stimulus is also fading in some regions. China is one of the few parts of the world that appears to be having considerable success in reopening its economy (pg 49).
Central banks have focused in recent months on strengthening their commitment to easy money for the foreseeable future. The Federal Reserve has altered its framework, making it clear it will hold interest rates at their current level until it has managed to sustain a period of above-target inflation. Markets believe the UK’s Bank of England will shift its policy rate into negative territory in 2021 (pg 41).
The lack of yield available in developed world government bonds has generated a search for income that has helped compress spreads in credit and emerging market debt (pg 80). Finding income is certainly one of the greatest challenges ahead (pg 51 & 72). But, given the ongoing uncertainties about the outlook, investors should continue to be selective and focus on quality companies and the segments of the market that are more likely to be supported by central banks in periods of market turbulence.
What has been remarkable about this recession has been the extent to which it has generated winners and losers (pg 70). The tech and ecommerce firms that have facilitated the shift to life at home have seen earnings expectations improve. In contrast, firms reliant on close social proximity, such as those in leisure and hospitality, have seen their earnings and share prices plunge.
This sectoral performance has, to a large extent, dictated regional performance. The more tech-heavy benchmarks, such as the S&P 500, have recovered the most strongly. Unless the winners can carry markets significantly higher, we will need to see some catch-up from the relative losers. This could happen – and indeed quickly – if there were news of a viable medical solution to put Covid-19 well and truly behind us.
Not only is the path of the virus a significant source of uncertainty, but also the final months of the year contain political events that could have wide-ranging implications for markets. Chief among these are the US election (pg 26) and Brexit. We therefore maintain our view that balance is essential, across both regions and asset classes. Flexible strategies and a quality bias have the potential to help a portfolio weather bouts of volatility (pg 57 & 83), and we believe alternatives such as infrastructure are an increasingly important component of a balanced portfolio (pg 84).