A selection of articles looking back through the markets last month.
Global Market Review
The “second wave” breaks
Share prices fell heavily around the world during October as Covid-19 infection rates continued to rise. Governments intensified their lockdown measures, triggering concerns over prospects for economic recovery.
“In the UK, rising infection rates led the Government to instigate fresh lockdown measures”
Investors were tense ahead of the US Presidential election; although polls suggested that Democrat candidate Joe Biden would win, there was still significant uncertainty over the result. Meanwhile, new cases of Covid-19 continued to increase in the US during October and reported deaths had reached 229,686 by the end of the month. Concerns were compounded by a continued deadlock between Republicans and Democrats over funding for Covid-19 relief. The VIX Index rose to its highest level since June. Share prices fell sharply, and the Dow Jones Industrial Average Index dropped by 4.6% over the month.
In the UK, rising infection rates led the Government to instigate fresh lockdown measures from 5 November to 2 December. Although schools, universities, factories, and construction sites will remain open, all pubs, restaurants, leisure facilities, and “non-essential” shops will have to close. The decision triggered widespread concerns over the impact on companies in affected sectors in the run-up to Christmas. The news of the shutdown spurred speculation that the Bank of England will introduce further economic stimulus measures to try and avert a double-dip recession. The furlough scheme was extended to cover the period, but employers will have to pay national insurance contributions and employee pension contributions. Mortgage holidays were also extended. The FTSE 100 Index fell by 4.9% during October.
Brexit negotiations continued but the UK and EU ended the month without reaching a deal. Having contracted by 11.8% in the second quarter, the eurozone’s economy expanded by 12.7% during the third quarter. The region’s recovery has been thrown into doubt by fresh lockdown restrictions as the governments struggle to contain the spread of infection. Several European countries – including France, Germany, and Belgium – tightened restrictions on living and working, and the European Central Bank indicated that it is prepared to increase stimulus measures if necessary. Over October, the Dax Index fell by 9.4%.
Asia & Japan Market Review
Question-marks over Asia’s recovery
The International Monetary Fund (IMF) expects the Asia Pacific economy to shrink by 2.2% in 2020; nevertheless, the region is set to post a healthy recovery in 2021 with growth of 6.9%. At individual country level, economic output is expected to be very mixed as governments address the impact of the Covid-19 pandemic. Japan is forecast to contract by -5.3% this year, whereas South Korea is expected to shrink by 1.9%, Malaysia by 6%, and the Philippines by 8.3%. In comparison, China is predicted to post positive growth of 1.9%.
“Sentiment amongst Japanese manufacturers improved slightly”
Sentiment amongst Japanese manufacturers improved slightly during the third quarter of 2020 according to the Bank of Japan’s (BoJ’s) quarterly Tankan survey. Although manufacturers remained pessimistic about the outlook, they were slightly less negative than in the previous quarter.
The BoJ cut its economic forecasts for the current fiscal year. BoJ officials now expect Japan’s economy to contract by 5.5% instead of -4.7%, and consumer price inflation is predicted to decline by 0.6% instead of -0.5%. Looking further ahead, the economy is expected to rally to achieve growth of 3.6% in the fiscal year ending in March 2022, compared with an earlier prediction of 3.3%. The BoJ reported that risks to their forecasts remain “skewed to the downside”, but its most recent estimations assume that Japan will not need to reinstate lockdown measures. During October, the Nikkei 225 Index eased by 0.9% and the Topix Index fell by 2.8%, while the TSE Second Section Index declined by 2%.
Although export activity has improved, the outlook remains uncertain as the coronavirus continues to affect demand both within Japan and overseas. Having fallen by 14.8% in August, Japan’s exports declined at a shallower rate, easing by 4.9%, while imports fell by 17.4% month on month, compared with August’s drop of 20.7%.
Speculation that Australia’s central bank was set to implement another cut in interest rates mounted during October as Governor of the Reserve Bank of Australia (RBA) Philip Lowe observed that further monetary easing would provide support for employment growth. Sure enough, shortly after the month ended, the RBA cut its key interest rate to 0.1%. Rates are considered unlikely to increase for “at least three years” or until inflation is “sustainably” within the target range of 2-3%. The ASX All Ordinaries Index rose by 2.1%.
Emerging Markets Review
China’s recovery gains traction
China’s economy continued to rebound from the impact of the Covid-19 pandemic. Having contracted at an annualised rate of 6.8% during the first three months of 2020, it grew by 3.2% in the second quarter and, during October, reported third-quarter expansion of 4.9%. The International Monetary Fund (IMF) described China’s economic recovery as “a rare positive figure in a sea of negatives”. During October, the country’s Premier, Li Keqiang, emphasised the need to consolidate the momentum for a steady recovery, and called on China’s business leaders to explore new business models and continue to develop new drivers for growth. Meanwhile, China’s export activity continued to improve during September, increasing by 9.9% year on year, while imports rose at an annualised rate of 13.2%. The benchmark Shanghai Composite Index edged up by 0.2% over October.
“A rare positive figure in sea of negatives” (IMF on China)
Consumer price inflation in Brazil rose by 0.64% during September, posting its strongest month-on-month increase for September since 2003. The rate of inflation was driven up by higher prices for food and fuel. On an annualised basis, inflation climbed by 3.14%, but remained below the central bank’s target rate of 4%, reassuring investors that monetary tightening is unlikely to be imminent.
The central bank’s key Selic interest rate remained unchanged at an all-time low of 2% in October. In a statement, officials said that Brazil is experiencing an “uneven” economic recovery, reiterating that expectations for inflation remain “significantly” below target and that the recent increase in inflation, caused by higher fuel and food prices and “persistent exchange rate depreciation”, is only temporary. Looking ahead, the central bank expects the Selic rate to rise to 2.75% next year, rising to 4.5% in 2022. The Bovespa Index fell by 0.7% during October.
The World Bank sharply downgraded its outlook for economic growth in India for the current fiscal year, cutting its forecast to -9.6%. The World Bank cited the impact of lockdown measures caused by the coronavirus pandemic, and the “income shock” suffered by households and companies. India’s economy is expected to recover to achieve growth of 5.4% in the following fiscal year. Elsewhere, during October, India’s Finance Ministry announced economic stimulus measures designed to shore up domestic demand against a backdrop of slowing consumer spending caused by the pandemic. The CNX Nifty Index rose by 3.5% over the month.
Europe Market Review
Fresh lockdowns across Europe
Prospects for Europe’s economic recovery were set back during October by the implementation of tighter lockdown restrictions as the second wave of the coronavirus pandemic intensified. Several countries – including France, Germany, Belgium, Spain, and Italy – introduced fresh restrictions on their populations.
“We have done it for the first wave; we will do it again for the second wave” (Christine Lagarde)
President of the European Commission Ursula von der Leyen said: “The Covid-19 situation is very serious. We must step up our EU response”. Policymakers at the European Central Bank (ECB) indicated that they were prepared to increase stimulus measures: officials are set to assess the economic outlook and the balance of risks in December, and will then “recalibrate” their instruments to ensure “favourable” financing conditions. ECB President Christine Lagarde pledged support, stating: “We have done it for the first wave; we will do it again for the second wave”.
As cases of Covid-19 continued to rise, business sentiment in Germany worsened for the first time in six months during October, according to the Ifo Institute, which commented: “German business is becoming increasingly worried”. Although confidence amongst manufacturers returned to positive territory for the first time since June 2019, sentiment within the services sector deteriorated sharply. The Dax Index dropped to its lowest level since May during October, and the index fell by 9.4% over the month; meanwhile, France’s CAC 40 Index declined by 4.4%.
Having contracted by 11.8% in the second quarter, the eurozone’s economy grew by 12.7% during the third quarter as activity benefited from the lifting of lockdown restrictions. Germany’s economy expanded by 8.2% during the quarter, while France’s economy grew by 18.2%. However, on an annualised basis, they contracted by 4.2% and 4.3% respectively. German exports rose for a fourth consecutive month during August; they climbed by 2.4% but remained 9.9% below their pre-Covid levels.
Brexit negotiations continued during October, but the UK and EU ended the month without reaching a post-transition trade deal. The three principal areas of contention between the two parties remained the level playing field, fisheries, and governance. The EU’s Chief Brexit Negotiator, Michel Barnier, said: “Our door remains open and will remain open up to the last possible day so we can continue to work together … but it takes two to make a deal. That is why we must also be ready to assume the consequences of a possible no deal”.
Global Bond Market Review
Global bonds in demand
Global bonds had a choppy October as expectations of fresh Covid-19 relief funding in the US were dashed by deadlock between the Republican and Democratic parties. Investor sentiment was further destabilised during the month as the “second wave” of coronavirus infections continued to sweep Europe and the US. Daily infection rates in the US reached record levels during October, while several European countries, including France and Germany, implemented or intensified social distancing measures and lockdowns. The yield on the ten-year German government bond declined during October, falling from -0.52% to -0.62% over the month. Meanwhile, the ten-year US Treasury bond yield rose to its highest level since early June during October, climbing over the month from 0.69% to 0.88%.
“Global bonds has been the most popular IA sector for two months out of the last three”
Global bond issuance was very strong during the second and third quarters of 2020, but credit ratings agency S&P Global Ratings expects the pace of issuance to moderate over the fourth quarter. Nevertheless, issuance over the whole of 2020 is forecast to be about 16% higher than in 2019. Issuance in 2021 is predicted to decline by around 3%, weakened by uncertainties over the coronavirus pandemic and the likelihood of a vaccine; the future path of monetary policy; the aftermath of the US Presidential election; Brexit; and possible volatility linked to trade negotiations. Looking further ahead, however, S&P believes that, despite a “likely decline” in 2021, debt is well-placed to remain robust in the years to come.
European default rates rose during September: Fitch Ratings’ trailing 12-month default rate increased by 3% amongst high-yield corporate bonds, and expects default rates to continue to rise into 2021, particularly in sectors that are affected by the reimposition or extension of lockdown measures and travel restrictions.
Bond funds enjoyed strong net retail sales in September, and fixed income was the most popular asset class for UK retail investors during the month, achieving net retail sales of £1.2 billion, according to the Investment Association (IA) . Global bonds has been the most popular IA sector for two months out of the last three, and notched up record net retail inflows of £937 million in September. The IA also reported solid demand for conventional and index-linked gilt funds. The only IA fixed income sector to remain out of favour was £ High Yield, which suffered outflows of over £113 million.
UK Bond Market Review
Fears of a “double-dip” recession
Demand for UK gilts rose during October as Covid-19 infection rates continued to climb, and the UK and EU failed to progress their post-Brexit trade negotiations. At the end of the month, the UK Government announced new lockdown measures for England, triggering concerns over the prospect of a double-dip recession.
“Public sector net debt has grown to 103.5% of the UK economy”
The yield on the benchmark UK gilt rose from 0.23% to 0.26% over October as a whole, but fell as low as 0.17% during the month as investors became increasingly nervous over the outlook for the UK’s trading relationship with Europe after 31 December.
The coronavirus pandemic has had an impact on public sector borrowing that is “unprecedented in peacetime”, according to the Office for National Statistics (ONS). Government borrowing rose to £36.1 billion during September, representing the third-highest borrowing in any month since records began in 1993. Public sector net debt has grown to 103.5% of the UK economy – its highest debt ratio since 1960.
Credit ratings agency Moody’s cut the UK’s credit status from Aa3 to Aa2, but upgraded its outlook from “negative” to “stable”. Moody’s cited a diminution in the UK’s economic strength caused by the pandemic and Brexit-related uncertainty. Moody’s believes that the UK’s fiscal strength will continue to deteriorate as a result of the pandemic, and criticised the Government for its inability “to manage change in a predictable and confidence-building manner”. Even if the UK manages to reach a deal with the EU before the end of 2020, Moody’s warned that it is likely to be “narrow in scope and therefore the UK’s exit from the EU will … continue to put downward pressure on private investment and economic growth”.
The UK economy expanded for a fourth consecutive month in August, although the rate of expansion slowed from 9.1% in June and 6.4% in July to 2.1% in August. Elsewhere, the rate of unemployment rose from 4.1% in the three months to July to 4.5% in the three months to August, representing its highest level since early 2017.
Deputy BoE Governor Sam Woods asked UK banks to assess their ability to cope effectively if interest rates are cut to zero or below zero, fuelling speculation that the central bank is poised to move its key rate into negative territory. UK interest rates have remained at an all-time low of 0.1% since March.
UK Equity Market Review
“Nightmare before Christmas”
As infection rates continued to increase in areas of England, the UK Government decided to implement another series of lockdown measures lasting from 5 November to 2 December. Leisure and hospitality venues and “non-essential” shops will be forced to close, although schools, universities, factories, and construction sites will remain open. The British Retail Consortium (BRC) warned that retailers face “a nightmare before Christmas” that will cause “untold damage to the high street”. Meanwhile, the British Chambers of Commerce (BCC) commented: “Many firms are in a much weaker position now than at the start of the pandemic, making it far more challenging to survive extended closures or demand restrictions”.
“The FTSE 100 Index dropped to its lowest level since April”
The furlough scheme was extended over the period of the second lockdown – although employers will have to pay national insurance contributions and employee pension contributions this time – and mortgage holidays were extended for up to six months. The FTSE 100 Index dropped to its lowest level since April during October, falling by 4.9% over the month, while the FTSE 250 Index declined by 0.6%.
The UK and EU ended October without making any progress in their Brexit negotiations. The EU’s Chief Negotiator Michel Barnier tweeted: “Working hard for an agreement. Much remains to be done”. At the beginning of the month, the EU launched legal proceedings following the UK’s decision to defy elements of the original Withdrawal Agreement. The Confederation of British Industry (CBI) urged the Government to secure a quick agreement, warning: “Businesses are doing what they can to prepare for Brexit. But firms face a hat-trick of unprecedented challenges: rebuilding from the first wave of Covid-19, dealing with the second, and uncertainty over the UK’s trading relationship with the EU … with each day that passes, resilience is chipped away”.
The rate of profit warnings issued by UK listed companies moderated in the third quarter compared with the first six months of the year, according to EY’s quarterly survey. 58 companies issued profit warnings during the period, led by firms in the industrial support services, investment banking & brokerage, and construction & materials sectors. This brought the year-to-date total to 524, exceeding the previous annual record set in 2001. Looking ahead, EY warned that companies face an “exceptionally difficult” autumn and winter, compounded by the impact of Covid-19 and Brexit.
UK Equity Income Market Review
What next for dividends?
Hopes that a nascent economic recovery could lead to a renaissance for UK dividends were dealt a blow at the end of October as the Government implemented further lockdown measures in a bid to stem the spread of Covid-19 infection. The news that “non-essential” shops, leisure and hospitality venues were set to close until early December triggered widespread concern about the impact on the UK economic recovery alongside fears for the future of the individual companies affected.
“Two-thirds of companies cut or scrapped their dividend payouts in the third quarter”
The FTSE 100 Index fell by 4.9% during October, and the FTSE 250 Index declined by 0.6%. The yield on the FTSE 100 Index rose slightly from 4.72% to 4.73% in October, while the FTSE 250 Index’s yield eased from 3.76% to 3.55% over the month. In comparison, the yield on the benchmark UK gilt edged up from 0.23% to 0.26% during October.
Having dropped by 57.2% in the second quarter of 2020, UK dividends fell by 49.1% to £18 billion between July and September, posting their lowest third-quarter total since 2010. On an underlying basis, payouts fell by 45.1% to £17.7 billion. According to Link Asset Services’ quarterly Dividend Monitor, two-thirds of companies cut or scrapped their dividend payouts in the third quarter, compared with the three-quarters that did so in the second quarter. Dividend cuts were particularly prevalent in the banking, oil, and mining sectors; in comparison, only two sectors – the “classically defensive” food retailers and basic consumer goods – grew their dividends on an annualised basis. Some companies reinstated their payouts during the third quarter, but Link warned that “huge uncertainty” remains, with “a long road ahead before dividends return to pre-pandemic levels”.
Although BP posted a profit in the third quarter, the company warned that the pandemic is likely to continue to affect demand for oil. Nevertheless, BP reiterated its commitment to its dividend payout: Chief Executive Bernard Looney stated: “We are firmly committed to our updated financial frame, including the dividend – the first call on our funds”, while the company’s Chief Financial Officer commented: “Funding the dividend remains our first priority”. Elsewhere, Tesco announced a 21% increase in its interim dividend payout following a 29% rise in pre-tax profits, and housebuilder Bellway reinstated its dividend payment, boosted by Government stimulus measures including the “Help to Buy” scheme and the stamp duty holiday.
US Market Review
US sentiment dips in October
US equity markets fell during October as cases of Covid-19 reached new daily records and news of rising infection rates and lockdowns in Europe affected sentiment amongst US investors. Concerns over the pandemic’s impact on the country’s economy were intensified by a continued stalemate between the Republican and Democratic parties over Covid-19 relief funding. Warning “the expansion is far from complete”, Fed Chair Jerome Powell said that the US could face ““tragic” consequences and “unnecessary hardship for households and businesses” if the government fails to provide sufficient support. According to Johns Hopkins University, confirmed cases in the US had risen above nine million and reported deaths had reached 229,686 by the end of the month.
“Investors were on edge during October ahead of the US Presidential election”
Investors were on edge during October ahead of the US Presidential election on 3 November. Although polls indicated that Democrat candidate Joe Biden was holding a lead over incumbent President Donald Trump, investors hoped for a clear result that would bring an end to the ongoing uncertainty. Over 85 million of eligible voters had cast their votes by the end of October, according to S&P Dow Jones Indices. Meanwhile, the VIX Index – which measures expected levels of volatility in US equity markets and is also known as the “fear index” – rose to its highest level since June.
During October, the Dow Jones Industrial Average Index fell to its lowest level since the end of July, and ended the month down by 4.6%. The technology-heavy Nasdaq Index fell by 2.3%, and the S&P 500 Index declined by 2.8%. Over October, the best-performing S&P industry sectors were utilities and communication services, which were the only sectors to end the month in positive territory. In comparison, information technology, energy, health care, and real estate performed poorly.
During the third quarter of 2020, the US economy expanded at an annualised rate of 33.1%, having shrunk by 31.4% in the three months to June. Elsewhere, although the rate of unemployment fell for a fifth consecutive month in September, dropping from 8.4% in August to 7.9%, it remained significantly higher than February’s rate of 3.5%. Amid signs that the labour market remained under pressure from the impact of the coronavirus pandemic, the US economy added only 661,000 new jobs during September, compared with larger gains in the previous four months.