Weekly Market Update

19/10/2020

Globally, China has become the first major economy to return to its pre-virus growth path, thanks to its rapid containment of Covid and effective stimulus response.

After a sharp contraction in Q1, GDP rose year-on-year in Q2 with growth extending in Q3 with a 4.9% year-on-year rise, driven by robust investment and exports. Previously softer consumer spending also accelerated, with retail sales rising by 3.3% in September from a year earlier. All of this has reassured markets that the recovery is on track:

In Pound terms, Chinese equities have been one of the strongest performers this year, rising by more than 26% through 2020; far above the US S&P 500’s 12.2%, rewarding investors who shifted their capital eastwards. Valuations are starting to look stretched but remain well below extremes seen in 2015, with the market now much more globally integrated and better supported by foreign buyers.

During the week, it was Asian and US equity markets that provided the only sources of positive return, with the MSCI Asia ex Japan index rising by 0.81% and the S&P 500 index rising by 0.75%. Despite rallies late in the week, UK and European equities lagged with losses of between 1.1-1.6%.

Brexit talks were again fraught with both sides accusing the other of various improprieties. Boris Johnson seemed to take a hard line in telling the EU’s Michel Barnier that there was ‘no point’ in him coming to London to continue talking unless Brussels adopted a ‘fundamental change of approach’. As before, this still seems like brinkmanship as negotiations are continuing.

In a reversal of last week, fixed income safe havens found popularity with UK Gilts and index-linked Gilts rising strongly by 1.7% and 2.7% respectively, with the latter boosted again by a falling Pound. Higher risk, lower credit rated bonds fell slightly and after sharp falls on Tuesday, gold and silver prices were broadly flat.

This week, we await further news on the myriad of important geopolitical ongoings that we expect to move financial markets. Perhaps most relevant today, the ever-fluctuating sentiment around a new US stimulus package has swung back to ‘positive’ again over the weekend, and should genuine progress be made on this, we would expect a positive response from risk assets.

Market views by Ollie Stone – Head of Portfolio Management and Fairstone Private Wealth Ltd (19th October 2020)

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