Summer is generally a quiet period for investment markets. Even this year, with the ongoing backdrop of the pandemic, this has held true. Markets have been content to sit and wait for a significant event to give direction. What that event is however remains the question. Virus developments, Government and Central Bank support, investor sentiment, and geopolitics all appear likely candidates however the only certainty of these factors in recent months has been uncertainty.
Return of the Virus
It is virtually impossible to leave your house and not be reminded of the pandemic. Be it masks, social distancing, or the absence of spectators at football matches, daily life is now quite different. However, even with these behavioural changes the virus is spreading, and the daily number of new cases is rising at a particularly high level in the North East of England and around Greater Manchester.
This rise in cases has increased the likelihood of restrictions being reintroduced in the future and, worryingly for markets, the possibility of an economically harmful full lockdown. Whilst it is unlikely at the moment that a full lockdown would be ordered, any rumours persisting around the possibility of one, if the number of cases became unmanageable, will only increase uncertainty surrounding future economic conditions. Uncertainty decreases confidence for investors to take long term positions in investment markets, and we would expect this to lead to increased volatility.
Stimulus Withdrawal
The swift recovery in investment markets following the initial outbreak of Covid-19 was driven by generous government fiscal support to businesses and the economy, through the likes of the furlough scheme, and central bank monetary support boosting liquidity within markets. This was undoubtedly a success; however, for both political and economic reasons these monumental policy programmes could never be infinite. With economies reopening, these sticking plasters that governments and central banks have applied will begin to be peeled off.
How painful this process will be, will depend on how the wounds caused by lockdown have healed. This is a major cause of uncertainty in markets for a number of reasons. Firstly, given that support programmes have boosted markets, there is the potential for asset prices to fall once they are removed. Secondly, some areas of the economy are receiving continued support from these policies such as Rishi Sunak’s announcement on 24th September 2020 of a changing, but continuing, furlough scheme. In other areas of the economy there is no guarantee that previously successful programmes will be reintroduced should they be required; without such copious support the market may not be able to recover in the way it previously has.
Tech Stocks
The standout story of the summer in investment markets has been the continued rise in the share prices of technology companies, particularly in North America. The fervent optimism of investors to be involved in the shares of companies such as Apple, Microsoft and Netflix, has driven US stock markets to record highs. Technology outperforming its stock market brethren is not a new phenomenon and the gap in returns has only grown larger in recent years as can be seen below.
Whether this boom in technology stocks is justified deserves its own article, and uncertainty around the sustainability of these companies’ share prices is growing as they continue their stratospheric rise. The start of September saw perhaps the first glimpse that they may not be, as the NASDAQ, a technology focused stock market index comprised of many of these companies, fell nearly 10% in the first week of September. This is not to say that this is the end of the technology boom. However, these falls are increasing uncertainty around its sustainability, which has a knock-on effect in increasing uncertainty surrounding rises in other stock markets.
Geopolitics
Before Covid-19, Brexit was the poster child of uncertainty. The inability of the UK and the EU to come to an agreement on the terms of a deal, or the lack thereof, has troubled markets ever since the referendum result. It is perhaps surprising therefore that with the introduction of the Internal Market Bill, a renege on the previously agreed Withdrawal Agreement, that markets appeared to barely flinch. The parable of the boy who cried wolf comes to mind as the threat of no deal is floated. However, for as long as no deal remains a possibility, the uncertainty surrounding what position the UK will be in come January is likely to see an increase in volatility in markets in the coming months.
Other areas that have seen uncertainty rise include Japan with the unexpected resignation in late August of Japan’s longest serving Prime Minister, Shinzo Abe. A relief for markets is that his successor is Yoshihide Suga, Abe’s long-term right-hand man. It is expected that Suga will continue his predecessor’s successful economic policies however markets are uncertain exactly what form this will take.
It is now under two months until the US presidential election and this is a great cause for uncertainty within markets. It is a race that is currently impossible to call and we will write about what impact either result will have on returns closer to the event.
All these factors combined mean markets are highly uncertain as to their direction. It is a fool’s gambit to provide predictions of the future that will inevitably be wrong. Our certainty is that our investment philosophy, which holds diversification at its heart, provides protection and opportunity for our investors’ portfolios in all scenarios, while active asset allocation allows us to take advantage of situations as they become clearer.
Invitation
If you would like to discuss anything in this update, please contact your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England. Note that the information in this market update represents the views of the Investment Managers at Vesta Wealth Limited at the time of writing, which may change.
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This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England. Note that the value of investments and the income from them call fall as well as rise.