Most Markets have ended October lower as the USA faced an Election, Europe introduced further Covid measure and the UK has additional concerns over BREXIT. However, as I write this report, the USA appear to have a new President and Pfizer have announced progress with a Covid vaccine resulting in Markets having overcome the losses of October.
The following chart shows the US and UK market during July. The FTSE 100 represents the 100 largest companies in the UK and the S&P 500 represents the 500 largest in the US. The Dow Jones is often quoted but this only shows the top 30 companies and is dominated by technology companies.
The current volatility within Markets does mean that news – good or bad – is having a more dramatic effect on share prices.
It may have surprised investors to see the FTSE pick up when lockdown 2 was announced but this overcame the uncertainty of when it would happen, as investors clearly thought it would.
Markets do not like uncertainty and looking at the broader picture, with Biden becoming President there is a better chance that trade relations with China will improve and this will reduce the risk of a Trade War that could hold back Global Recovery. The US is also expected to expand fiscal stimulus and take (more) action in combatting Covid.
Biden has said he will reverse the generous reduction in Corporate Tax that Trump enacted but this is not expected to happen for some time.
The US is the engine room of the Global economy and it has been achieving a recovery in manufacturing – as indeed has china and the Far East.
With Governments Worldwide pumping money into their economy to stimulate growth – be it Quantitative Easing or funding Infrastructure – we do know that Equities (shares) are one of the few assets that has the potential for capital growth.
We also know that the Federal Reserve has said that interest rates in the US are unlikely to increase until at least 2023 so investing in Government loans is now not as attractive as it has been. I expect the UK and other developed economies will not move on interest rates for a long time too.
It is likely that inflation will increase in the next couple of years as this will effectively reduce the value of the huge loans Governments have taken out in order to fund support for Covid.
As a result, I am reducing the amount exposed to Government loans (Gilts) in favour of adding to Corporate loans (Bonds) and a small increase in equity exposure.
We will be writing to all clients with recommendations for their own portfolios and we can now make the changes to Property exposure that was deferred from August because most Property funds are now open for trading.
The information provided in this report is based on my own opinion and offers no guarantee that expectations will be met.
As always, should you have any concerns you wish to raise, please do contact me.
Please note that we are altering the frequency of information being provided to clients within our ongoing service and details are attached.
In the current Covid situation we remain open but prefer to have remote meetings with clients either via video or telephone.
Keep safe
Ian Pennicott AFPS
Chartered Financial Planner