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Quarterly market update: Q4

Written by Gavin Haynes · 13.10.20

Gavin is a leading authority on portfolio management, fund selection and asset allocation. In his spare time he enjoys wildlife photography, hiking and watching cricket.

It is no surprise that the COVID-19 pandemic has continued to dominate the backdrop for investment markets over the past quarter. However, a sense of calm has been restored following the extreme market moves during the first half of the year. The MSCI World Index posted a healthy gain of more than 6% in the third quarter, but unfortunately things were more gloomy in the UK where the main stock market index fell more than 4% in the period (Source: Financial Express).


2020 has been a wild ride for markets due to the impact of COVID-19, starting off with significant falls in the first quarter only to see some remarkable gains in the second on the back of central bank and government support all over the world in attempts to help economies recover. During the summer months market movements were more muted as some investors actually managed to go on holiday (congratulations to all those who managed to get on foreign soil!).

So what now? What are the key points to consider and what are the themes that are likely to influence investment markets for the rest of the year?


COVID-19

As we go into the final quarter of 2020 there is a feeling of groundhog-day as new restrictions are imposed to combat a second wave of the virus. How this plays out will remain the dominant driver of investor sentiment, probably until a vaccine is rolled out at scale. This is unlikely to happen anytime soon, but if progress is seen to be made then that in itself may provide a significant boost in confidence and markets could rally.


Politics

Political uncertainty is also likely to impact on investor sentiment during the final quarter. The US election will dominate the headlines on both sides of the pond and will undoubtedly cause some market volatility, at least in the short-term. For investors with a long-term approach and diversified portfolio, it is unlikely to influence long-term returns. Closer to home the ‘deal or no deal’ flipflopping around Brexit will come to a head. The final outcome is still uncertain, but markets appear to be pricing in some sort of deal that would avoid further short-term damage to the already ravaged economy. Having said that, UK markets are still cheap relative to many others and over the long-term, more domestically focused medium and smaller companies could turn out to be the beneficiaries.


Currency

Another key theme for 2020 so far has been the weakness of sterling. Currency traditionally acts a better barometer of an economy than the stock market, and the ongoing wrangling over Brexit and the severe impact of COVID-19 have hit the pound hard. However, this has been great for UK investors who have invested funds with overseas assets. On many measures sterling appears undervalued and if a no-deal Brexit were to be avoided then the pound should rally, whereas a bitter no-deal would likely see the pound plunge further.


Interest rates

At last, an area that provides a degree of certainty – low interest rates are definitely not going anywhere anytime soon. The sheer scale of the response to COVID-19 means that central banks just cannot afford to increase interest rates. This was confirmed by the Bank of England and other central banks earlier this summer as they reaffirmed their positions. The US Federal Reserve even made a commitment that rates would not rise before the end of 2023. Whilst this level of certainty can be comforting in a world where most other things change from one day to the next, the reality is that low interest rates are bad news for cash saving accounts and some parts of the bond markets. As a result, investment areas that can offer sustainable levels of income will be sought after. Good quality dividend stocks and infrastructure funds are likely to benefit.


Investment styles

Let’s be honest, 2020 has not been fun for value investors, whereas growth investors have had a ball. Growth as a style has not only held up during the crisis but has significantly outperformed, led by holdings in big tech which have been obvious beneficiaries in this new world we live in (Source: Financial Express). Having said that, history suggests that value stocks should see the sharpest recovery in a recovery phase. The million-dollar question is just, when? Value has been a dog for a long time and whilst some investors are starting to throw in the towel, many strategists believe that having exposure to both investment styles makes sense at this stage as we may be in for a style reversal.


Sustainability

If there can be any positive drawn from the pandemic it is the dramatic shift in the way money is being invested. ESG and sustainable investing is no longer a niche investment style, it is increasingly becoming entrenched in mainstream investing across the globe. Therefore, going forward it is likely that ESG factors will have a material impact on how assets are priced, as well as the broader direction of capital.


The information in this post is not financial advice, it is provided solely to help you make your own investment decisions. If you are unsure about whether an investment is appropriate for you, please seek professional financial advice. You can find more information here.

When you invest you should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return.

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