A selection of articles looking back through the markets last month.
Global Market Review
Rising infection levels knock sentiment
Share prices generally fell during September amid concerns over rising infection levels and their potential impact on economic activity. Investors’ worries were compounded by doubts over Brexit negotiations, continuing friction between the US and China over trade, and uncertainties surrounding the impending US Presidential election.
The BoE warned that the economic outlook for the UK remained “unusually uncertain”
In the US, the Federal Reserve (Fed) sought to boost investor sentiment by reiterating its intention to maintain its key federal funds rate near zero until the economic recovery is “far along”. Fed Chair Jerome Powell also urged Congress to do its part in supporting the economy. The Dow Jones Industrial Average Index fell by 2.3% during September; meanwhile, the Nasdaq Index – which has performed particularly strongly in recent months – dropped by 5.2% as investors took profits.
In the UK, the imposition of fresh regional lockdowns alongside broader restrictions on socialising drove down share prices, and the FTSE 100 Index fell by 1.6%. Chancellor of the Exchequer Rishi Sunak announced that the furlough scheme will be replaced by the Job Support Scheme, in which the Government and employers will top up the salaries of workers in “viable” jobs. The Bank of England (BoE) warned that the economic outlook for the UK remained “unusually uncertain”. Although BoE officials appear to be moving closer to considering negative interest rates as a means to bolster the economy, the BoE’s Chief Economist Andy Haldane subsequently played down speculation over any imminent prospect of negative rates.
Following the resignation of Shinzo Abe on health grounds in August, Yoshihide Suga took office as Japan’s Prime Minister in September as expected. Japan’s economic contraction in the three months to June proved worse than initially calculated. The country’s economy shrank at an annualised rate of 28.1% during the period, compared with an initial estimate of -27.8%. The Nikkei 225 Index rose by 0.2% in September.
The World Health Organisation (WHO) warned that rising infection rates across Europe should be “a wake-up call”, and European Central Bank (ECB) President Christine Lagarde cautioned that the pandemic will continue to weigh on economic activity in the region. The annualised rate of inflation in the eurozone slipped into negative territory for the first time since May 2016 during August, falling from 0.4% to -0.2%. The news triggered speculation that the ECB will have to increase stimulus measures. The DAX Index fell by 1.4% over September.
Asia & Japan Market Review
Australia tips into recession
As anticipated, Yoshihide Suga took office as Japan’s Prime Minister in September following the resignation of Shinzo Abe on the grounds of ill health. Mr Suga is widely expected to carry on with Mr Abe’s “Abenomics” policies.
“Australia’s first recession for 28 years was confirmed during September”
Japan’s economy shrank by more than initially calculated during the three months to June. The country’s economy contracted by 28.1% year on year during the quarter, compared with an earlier estimate of -27.8%. Capital expenditure fell more steeply than originally calculated, dropping by 4.7% instead of by 1.5%.
Real wages fell for a fifth consecutive month during July, while household spending fell at an annualised rate of 7.6%. Japan’s exports posted a double-digit decline for a sixth consecutive month during August, posting an annualised drop of 14.8%. Activity was dragged down by a 21.3% decline in shipments to the US . Although exports to the rest of Asia fell by 7.8%, shipments to China increased at an annualized rate of 5.1%.
Over September, the Nikkei 225 Index rose by 0.2% while the Topix Index climbed by 0.5%. In contrast, the TSE Second Section Index – representing medium-sized companies – fell by 2.6%
Australia’s first recession for 28 years was confirmed during September: having contracted by 0.3% during the first quarter of 2020, the country’s economy shrank by 7% in the second quarter, driven by a sharp and “unprecedented” drop in household consumption; meanwhile, the household saving-to-income ratio rose to 19.8%, its highest levels since June 1974. Share prices in Australia fell to their lowest level since June during the month, and the ASX All Ordinaries Index ended September down by 3.8%
Bank lending to households rose sharply during August in South Korea, according to the country’s central bank, boosted by home mortgage lending and funds for stock investment. Policymakers at the Bank of Korea (BoK) expect South Korea’s economic growth to fall by -1.3% this year, compared with its May forecast of -0.2%, after which it is predicted to expand by 2.8% in 2021. Although export activity is likely to pick up, the recent resurgence of Covid-19 infections is forecast to put a brake on private consumption. Downside risks include a global and domestic “second wave” of infection, delays to the recovery of South Korea’s semiconductor industry, and increasing tensions between the US and China. The Kospi Index edged up by 0.1% over the month.
Emerging Markets Review
China’s recovery gains traction
Economic data released in September fuelled hopes that China’s post-Covid economic recovery might be gathering pace. Industrial production rose at its fastest rate since December during August, climbing at an annualised rate of 5.6%, and retail sales posted their first positive growth during 2020 in August, rising at an annualised rate of 0.5%. Sales of communications appliances increased by 25.1% year on year, while car sales rose by 11.8% and commodities by 11.4%.
“Coronavirus has pushed Asia’s developing economies into recession for the first time in almost 60 years”
As overseas economies emerged from lockdown, China’s exports rose at an annualised rate of 9.5% in August, boosted in part by shipments of medical supplies. However, there are fears that overseas demand could peter out if a second wave forces countries back into lockdown. Over September, the Shanghai Composite Index fell by 5.2%.
The Asian Development Bank (ADB) reported that coronavirus has pushed Asia’s developing economies into recession for the first time in almost 60 years. The ADB expects developing Asian economies to contract by 0.7% this year, after which it is forecast to recover to achieve growth of 6.8% in 2021.
Brazil’s economy fell into recession during the second quarter, shrinking by a record 9.7% following a first-quarter drop of 2.5%. The contraction was caused by “historical” declines of 12.3% in industry and of 9.7% in services as a result of coronavirus-related shutdowns and social distancing. Together, industry and services account for 95% of the country’s economy. The Bovespa Index fell by 4.8% during September.
Deficits in Latin American economies are set to narrow in 2021 according to credit ratings agency Fitch, underpinned by a return to economic expansion, higher commodity prices, and the winding-down of fiscal support packages. Nevertheless, recovery is likely to be uneven and may be hampered by a lack of political will for reform. Social and political pressures have hampered moves to contain spending growth in the past and are likely to continue to create headwinds.
Recovery from the pandemic amongst emerging markets is under way, according to S&P Global Ratings, but is happening at different speeds in different countries, and social distancing measures have taken their toll on economic growth. S&P believes that a slower-than-expected recovery could place additional pressure on companies, resulting in a higher rate of bankruptcies amongst medium-sized and smaller companies; in turn, this would push up unemployment and undermine financial institutions’ asset quality.
Europe Market Review
A wake-up call for Europe?
Investor sentiment in Europe was dampened during September by an uptick in coronavirus infection rates across the region, and the World Health Organisation (WHO) warned that the news should be “a wake-up call”. The DAX Index fell by 1.4% over September, while the CAC 40 Index declined by 2.9%.
“The eurozone’s annualised rate of inflation fell into negative territory”
The eurozone’s annualised rate of inflation fell into negative territory for the first time since May 2016 during August, falling from 0.4% to -0.2% and driven down by a sharp decline in energy prices. The news sparked speculation that the European Central Bank (ECB) might opt to extend stimulus measures. ECB President Christine Lagarde warned that the coronavirus pandemic will continue to weigh on economic activity in Europe and “poses downside risks to the economic outlook”. She reiterated the central bank’s readiness to take action and “adjust all of its instruments as appropriate”.
Consumer and business sentiment in the euro area continued to rise during September, according to the European Commission, boosted by “waning pessimism in industry, retail trade, construction and, in particular, services”. However, the overall level of confidence remains below pre-pandemic levels; while Germany has recovered 80% of the confidence lost during lockdown; in contrast, Spain has recovered only 55%. Consumer confidence was lifted by a rally in expectations about the general economic backdrop and a small improvement in households’ optimism about their own financial situations.
The Ifo Institute upgraded its economic growth forecast for Germany from -6.7% to -5.2% amid signs that the country’s economy might recover more swiftly than originally expected. Nevertheless, the outlook remains very uncertain, clouded by question-marks over the future trajectory of the coronavirus pandemic and concerns over the impact of a “second wave”. Ifo also reported that business confidence had strengthened for a fifth consecutive month during September, despite an increase in Covid-19 infections, although sentiment in the services sector was undermined by worries over prospects for the hospitality and tourism sectors.
Germany’s exports rose by 4.7% during July, but remained 11.1% below their levels a year earlier, and exports to the US and the UK dropped at annualised rates of 17% and 12.6% respectively, raising concerns about the outlook for demand from key trading partners; in comparison, exports to China fell by just 0.1%. Meanwhile, imports rose at a monthly rate of 1.1%, but fell at an annualised rate of 11.3%.
Global Bond Market Review
US politics dominate sentiment
US bond yields were boosted during September by hopes that fresh fiscal stimulus might be introduced. However, by the end of the month, a deal had not been agreed between Republicans and Democrats. Over September as a whole, the yield on the ten-year US Treasury bond eased from 0.72% to 0.69, and the 30-year Treasury bond yield fell from 1.49% to 1.46%. Looking ahead, investor sentiment is likely to remain hostage to political developments in the US ahead of the Presidential Election on 3 November.
“Investor sentiment is likely to remain hostage to political developments in the US”
Ratings downgrades have slowed but “negative” outlooks have reached unprecedented highs during the third quarter, according to S&P Global Ratings. Since the start of the Covid-19 pandemic, issues rated “B” and below have represented more than 50% of downgrades, and 90% of defaults have been from companies rated “CCC”. S&P expects defaults amongst speculative-grade issues to increase by June 2021 from 6.2% to 12.5% in the US, and from 3.8% to 8.5% in Europe. Moreover, although some sectors – including technology, consumer staples, and housebuilders – have remained largely unaffected by the pandemic, other industries – notably airlines, hotels, and automotive – are likely to continue to feel the pain well into 2023. Meanwhile, banks are expected to be able to absorb the shock from the coronavirus crisis, but recovery is set to be slow and uneven.
Elsewhere, credit ratings agency Fitch reported high rates of global corporate defaults: over the first eight months of the year, global corporate defaults rose to 42 and were particularly concentrated amongst transportation, retailing, and commodity-related sectors. Looking ahead, Fitch also expects to see relatively high levels of corporate defaults amongst speculative-grade issuers. Although the immediate economic recovery from the impact of lockdown has been relatively swift, the pace of the broader global recovery is set to slow: the US and eurozone economies are not predicted to return to pre-Covid levels until the fourth quarters of 2021 and 2022 respectively.
Bonds remained the most popular asset class for UK retail investors during August, amassing £.18 billion in net inflows. According to the Investment Association (IA), Global Bonds was the most popular IA bond sector, and the second most popular sector overall. £ Strategic Bond was the fourth most popular sector, and every IA bond sector experienced positive net retail inflows during August apart from £ High Yield.
UK Bond Market Review
Speculation over negative rates
Risk-averse investors focused on perceived safe havens during September, spurred by fears that fresh lockdown measures could undermine economic recovery. The yield on the ten-year gilt fell from 0.31% to 0.23% over September but dipped as low as 0.14% during the month.
“BoE officials appear to be moving closer to considering negative interest rates”
The Bank of England (BoE) described the UK’s economic outlook as “unusually uncertain”, citing rising Covid-19 infection rates and a lack of resolution over the UK’s post-Brexit trade deal with the EU. BoE officials appear to be moving closer to considering negative interest rates as a means to boost the economy; minutes from the Monetary Policy Committee’s (MPC’s) September meeting showed that the central bank intended to begin “structured engagement” with financial institutions on the operational issues associated with negative rates. However, the BoE’s Chief Economist Andy Haldane subsequently played down speculation over any imminent prospect of negative rates, saying that they were not imminent.
The UK economy contracted slightly less severely than initially estimated during the second quarter, according to the Office for National Statistics (ONS), which revised its figures from -20.4% to -19.8%. Nevertheless, this still represented the most severe quarterly economic contraction for the UK since records began in 1955. During July, the economy expanded by 6.6%, notching up its third straight month of growth, although the pace of expansion slowed from June’s rate of 8.7%. Over the three months to July, the economy contracted by 7.6%, and the ONS reported that the UK has recovered only “just over half of the lost output caused by the coronavirus”.
The UK’s economic recovery is starting to lose momentum, according to IHS Markit/Cips, which highlighted the prospect of higher unemployment. New business levels have weakened, and business optimism fell to its lowest level since May. The unemployment rate rose from 3.9% in the three months to June to 4.1% in the three months to July, representing its highest level for two years. Almost 700,000 workers have vanished from company payrolls since March.
The annualised rate of inflation fell sharply from 1% in July to 0.2% in August, driven down by lower prices resulting from the Government’s Eat Out to Help Out scheme, and representing the UK’s lowest rate of inflation since December 2015. Prices in restaurants and cafes dropped by 2.8% year on year, posting their first annualised negative growth since records began in 1989.
UK Equity Market Review
Brexit trade deal remains unresolved
Share prices in the UK fell during September amid concerns that a surge in infection rates, accompanied by localised lockdowns, could undermine economic recovery. Both the FTSE 100 Index and the FTSE 250 Index fell to their lowest levels since May during the month; over September as a whole, they declined by 1.6% and 2.7% respectively.
“Good news on the economy is being crowded out by fears about the future” (Andy Haldane, BoE)
The Government revealed its Job Support Scheme, which is set to replace the furlough scheme. The new scheme, in which the Government and employers will top up the salaries of workers in “viable” jobs, will begin on 1 November. The Chancellor also extended a VAT cut from 20% to 5% for companies in the tourism and hospitality sectors until March 2021.
The UK economy grew by 6.6% during July but remained 11.7% smaller than its pre-lockdown level. Whilst acknowledging an “unholy trinity of risks from Covid, unemployment, and Brexit”, the BoE’s Chief Economist Andy Haldane cautioned against “Chicken Licken” worries about the economy, warning: “Good news on the economy is being crowded out by fears about the future”.
The UK and EU ended September without any resolution over a Brexit trade deal. While Minister for the Cabinet Office Michael Gove insisted that the UK would not remove sections in a bill that will contravene agreements laid out in the Brexit deal with the EU, European Commission Vice-President Maros Sefcovic reiterated: “The Withdrawal Agreement is to be implemented, not to be renegotiated – let alone unilaterally changed, disregarded or disapplied”, and urged both parties to “move into higher gear”.
The British Chambers of Commerce (BCC) reported that only 38% of UK firms have undertaken a Brexit risk assessment on their business in 2020, and 51% had not taken any of the eight steps recommended by the UK Government to prepare for changes in the movement of goods between the UK and the EU. Meanwhile, the British Retail Consortium (BRC) warned that a no-deal Brexit is likely to result in higher food prices caused not only by tariffs, but also by administrative and checking costs. Elsewhere, the UK and Japan agreed a post-Brexit trade deal that aims to increase trade between the two countries by an estimated £15.2 billion. Despite welcoming the deal, the BCC urged the UK Government to “redouble” its efforts to secure a Free Trade Agreement with the EU.
UK Equity Income Market Review
Search for yield remains a challenge
UK share prices were dragged down during September by fears that the economic recovery could be held back by a “second wave” of coronavirus infections. The FTSE 100 Index fell by 1.6% during September, while the FTSE 250 Index declined by 2.7%. The yield on the FTSE 100 Index edged up from 4.70% to 4.72% in September, while the FTSE 250 Index’s yield climbed from 3.66% to 3.76% over the month. In comparison, the yield on the benchmark UK gilt fell from 0.31% to 0.23% in September.
“2020 will be the worst year for global dividends since the financial crisis”
In the FTSE’s quarterly reshuffle of its UK equity indices, discount retailer B&M was promoted to the FTSE 100 Index, replacing broadcaster ITV, which was demoted to the FTSE 250 Index. A further nine companies were promoted to the FTSE 250 Index, including Premier Foods, Diversified Gas & Oil, translation services company SDL, and pharmaceuticals firm Vectura.
During September, supermarket operator Morrisons reported a 25.3% drop in half-year profits, citing the impact of higher costs incurred by the Covid-19 pandemic. Nevertheless, the supermarket reported an 8.8% increase in sales and raised its dividend, although it deferred a decision on its special dividend. Meanwhile, despite reporting a sharp drop in profits, news publisher Reach revealed a bonus dividend payout and confirmed that it intends to resume its programme of ordinary dividend payments when market conditions improve. Elsewhere, plumbing and heating supplier Ferguson announced the reinstatement of its dividend payout, citing “better than expected” trading and drinks manufacturer Fever-Tree raised its interim dividend payout.
Although equity funds in general enjoyed net retail inflows of £340 million during August, according to the Investment Association (IA), UK equity funds suffered outflows of £748 million. The UK Equity Income sector experienced outflows of almost £275 million and the Global Equity Income sector experienced outflows of almost £275 million and £62 million, respectively.
2020 will be the worst year for global dividends since the financial crisis, according to Janus Henderson’s Global Dividend Index, which expects headline global dividends to fall by 17% in a best-case scenario, representing a total payout of US$1.18 trillion. The worst-case scenario would see a headline drop of 23% to US$1.10 trillion. North America is expected to present the greatest area of uncertainty in Q4, when payouts for the next four quarters are announced.
US Market Review
Counting down to the Presidential election
The Nasdaq Index has performed strongly in recent months, driven up by robust performance from technology shares; over September, however, the index fell by 5.2% as investors took profits, worried by the possibility of a second wave of Covid-19 infection and by uncertainties over the impending Presidential election. The Dow Jones Industrial Average Index fell by 2.3% during September, while the S&P 500 Index declined by 3.9%. The Vix Index – which gauges volatility in US markets – rose to its highest level since June as the date of the election moved closer.
“The Fed intends to keep its key federal funds rate near zero until the recovery is ‘far along”
The US economy has recovered most of the losses caused by lockdown, according to credit ratings agency Fitch; looking ahead, however, growth is expected to slow in the fourth quarter of the year. The Federal Reserve (Fed) intends to keep its key federal funds rate near zero until the recovery is “far along”, but also urged Congress to do its part to support the economy. The US budget deficit had surged above US$3 trillion by the end of August, driven up by government spending to mitigate the Covid-19 crisis. The rate of unemployment fell to 8.4% in August, returning to single figures for the first time since March. The economy added 1.4 million new jobs, although an increase in government hiring was attributed to temporary hiring for the 2020 US Census.
The Fed may decide to extend curbs on dividend payments and share buybacks by leading banks. Ahead of fresh stress tests, the Fed also plans to publish individual test results for each of the 33 banks involved, instead of releasing aggregated results.
The World Trade Organisation (WTO) ruled that the imposition of tariffs on Chinese goods by the US in 2018 were “inconsistent” with international trade regulations. The decision to impose tariffs prompted an escalating trade dispute that has yet to be resolved. The US rejected the WTO’s ruling, insisting it must be allowed to “defend itself against unfair trade practices”. In contrast, China welcomed the ruling and called on the US to “take real actions … to safeguard the multilateral trading system”. Later in the month, President Donald Trump redoubled his criticisms towards China over the coronavirus pandemic. In response, China’s President Xi observed: “Countries may engage in competition, but such competition should be positive and healthy … major countries should act like major countries”.