Over the summer I was very fortunate to have four weeks R&R. There has been a great deal that I have learnt during this time, and it has provided a fresh perspective on what has just happened.

In one of my updates I mentioned how the FTSE is a bellwether for how well the UK is doing, and in turn how investments have done. In the month I was away the FTSE hardly moved and seems to have settled around the 6,000 mark.

In terms of the portfolios, the table below shows how they have performed up to the end of August, and we can see there has been significant improvement:

 1 Jan – 19 March 20201 Jan – 31 August 202012 months to 31 August3 years to 31 August
Cautious Portfolio-25.80%-2.65%+2.06%+10.07%
Balanced Portfolio-27.55%-0.93%+5.08%+13.81%
Moderately Adventurous Portfolio-29.16%+0.67%+7.02%+15.99%
Adventurous Portfolio-29.29%+2.12%+8.89%+18.30%
Positive Impact Portfolio-21.76%+3.81%+11.01%+24.18%

Of course, past performance is no guide to the future and investments can fall as well as rise, and we do not know how this might change over the coming months. But it is a reminder of how quickly things changed, and how remaining invested in the market was better than trying to time getting in or out of it.

It is also worth highlighting the variance in markets; the table below shows the top and bottom 3 IMA sectors based on the 15 main sectors and regions.

Top 3Bottom 3
China/Greater China +20.35%UK Property -3.52%
North America +8.34%UK Smaller Companies -11.07%
Asia Pacific excluding Japan +5.00%UK All Companies -17.09%

Europe excluding UK is up +0.41%, and European Smaller Companies is up +2.18%. Emerging Markets is down -2.02%.

We have had a couple of updates this week and to ease ourselves back into things I have shared these thoughts. The aim is to issue these updates monthly unless things change significantly.

On the positive side, it seems we could be much closer to a vaccine, and on the other side risks abound not only on the economic impact but also the US election and Brexit.

JPM Market Watch

  • There is a second wave; although this is possibly due to increased testing. Mortality rates are much lower
  • There are constraints on the ability to get back to normal with about 80%-85% being about the level, and this is feeding into economic data with the initial V shape recovery levelling out
  • The recovery fund in Europe has significantly reduced the risk of a ‘break-up’ and is reflected in the strength of the Euro in recent months
  • Whereas many European countries have focused on retaining jobs and extending the furlough scheme, the UK looks set to end this in October. Around 4 million people are still on the scheme and there are fears that the UK could have significant unemployment by the end of the year
  • Brexit is fast approaching, and November is the month to watch – currently there seems to be no compromise between full sovereignty and a close relationship with the EU. There is a chance a solution will be found but there are significant risks 
  • Globally countries like South Korea, Hong Kong, Singapore, and China have all recovered strongly, and have been able to isolate outbreaks more effectively
  • The US has not done well with a big political divide impacting both mortality and infection rates. Unemployment is over 10%, and there has been no replacement to the generous unemployment benefit with no agreement between the parties
  • In terms of the election, the voting system favours the Republicans. A 1% victory for Biden would favour Trump, 1-3% would be too close to call and only if it is 3% plus would you see a Biden victory. The gap between Trump and Biden is narrowing and a vaccine would be a game changer for the election
  • Although elements of the US market have pushed this higher this is not all areas. The current environment favours US tech, defensive and growth stocks. If a vaccine becomes available then there could be a change to favour value, cyclical, and Europe/UK/Emerging markets stocks. The change could happen very quickly
  • They do not think there will be a rotation away from those stocks currently doing well but more a catch up with other stocks

BMO Economic Update

  • The virus is fighting back, and this means the economic recovery is incomplete. It is clear that whilst there is social distancing, certain areas cannot recover
  • The worry is that markets are pricing in a strong recovery and therefore this seems to paint a gloomy outlook for equities
  • However, Oxford have passed Phase 1 and 2 of testing. Phase 3 has been running in South Africa and Brazil since June and just started in the US. Signs are very positive. Phase 1 and 2 have shown that the vaccine is safe and produces T-Cells and antibodies. The UK has ordered 100 million doses, and 30 million are due to be delivered by the end of September
  • Moderna started Phase 3 testing in late July, and in total there are 7 vaccines in Phase 3. On average it takes 10 years to develop a vaccine, this could be months. If the US has a vaccine by November this could be a game changer for the election
  • There is normally an 85% chance of a successful vaccine when it enters Phase 3 of testing. We should remember that a flu vaccine offers 50% chance of protection, this could be the same for a COVID vaccine
  • Europe has a higher population compared to the US but has performed better in terms of retaining jobs, mortality and infection rates
  • The UK remains one of the weakest areas although it has some of the best data globally with very low infection rates within the community, and 80% of those testing positive having no symptoms. On the positive side high frequency data is significantly improving in the UK and we could expect more positive data surprises
  • In terms of the virus, although rates are up significantly in France and Spain, mortality rates have not really moved from the lows. It is clear as lockdown eases more young people are being infected but there are fewer hospital admissions and fatalities
  • Regarding the debt being built up by governments although there is talk of tax rises in the UK and the US, they believe that governments will not be keen to rush tightening policies whilst economies are recovering
  • In terms of the election, the odds of a clean sweep have fallen to around 60%, and the markets are pointing to a Biden victory but they think a lot can change, and a vaccine could shift the election in favour of Trump
  • Although parts of the market are pushing the S&P higher, they do not think this can be compared to the dot.com bubble, and that the right fundamentals remain in place. It is also worth adding that S&P 500 earnings have been above expectations, and they are expecting forecasts to bounce

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.