Market Update – November 2020

Chris Brown, CIO, 5th November 2020

In our October client overview we wrote that we had taken risk up a little in our investment portfolios. This meant adding some high yield credit and equities (mainly in Europe) where we thought it was appropriate. We wrote our rationale in detail in our update but – broadly – we thought there were four risk events on the horizon and, on balance, they looked more likely to be positive for markets than negative. These risk events were:

  1. The US election
  2. A Brexit deal or no deal
  3. The second wave of the virus, particularly in Europe but also likely coming to the US
  4. The appearance of a vaccine

A month has passed – how are we doing?

First, as we write, Biden looks likely to be the next US president. But it is close and the Republicans should keep control of the senate. We wrote in October that a Blue Wave (where the Democrats in fact took the senate) was the most likely outcome and on balance would be good for markets (with higher taxes down the line offset by more stimulus and less uncertainty straight away). Instead we have gridlock. It turns out the markets like gridlock. The risk of higher taxes now looks much reduced and all the unpredictability of Trump and his trade wars has gone away. We still think a stimulus package of some sort will get done. On the back of this, many equity markets are up around 5% in the last two days. These markets include our Europe and emerging markets investments which particularly like the pushing of trade wars down the US political agenda. So although it was a surprise how close the US election was, we still look to have got the result we wanted.

While the drama in the US has dominated the headlines, Brexit continues to inch along to some sort of conclusion. A Biden presidency should add some pressure to the UK side to do a deal with a democratic president more sensitive to disrupting the Irish status quo than Trump. Also the EU and UK look to be pretty close with plenty of incentives on both sides to get this done. We wrote in October that we were looking to rotate into some more UK focussed assets but were waiting until the deal finally got signed. That remains our position today. The second European lockdown has helped our timing on this but we still expect to reallocate to more UK domestic investments once the Brexit ink is dry.

This leaves the virus. If you are living under a rock it might be better to stay there for the next few weeks as the major European countries go into lockdown again. That said, we think the economic damage will be more contained second time round. Schools and universities are open as are more businesses. At some point, we think, positive news about a vaccine will be back on the agenda. Our approach remains to ride through ebbs and flows of the virus waves and to make sure we capture the gains as and when life slowly returns to normal. This has been our approach really since the markets sold off hard in the first quarter of this year. We were surprised by how far and how fast markets recovered but by keeping our exposure on we captured our fair share of these gains. We are sticking with this plan. Economic activity is likely to be higher in a year’s time that it is today. There will be winners from that and we want to make sure we own some of them.

As we wrote in more detail a few weeks ago have kept this update on the shorter side. As ever, if you want to get in touch to discuss any of this in more detail please get in touch. After 9 months of the pandemic our Zoom skills are just about good enough that we can successfully handle a virtual client meeting. We wish you and your families all a safe winter and, as always, we will be in touch when we think market moves warrant a new update.