A Month of Two Halves
The first half of the month saw a gradual appreciation of risk assets before a mid-month realisation reversed gains made in most markets and prices of those assets fell in the second half of October.
Investor nervousness over the US Presidential Election and the rapidly increasing cases of Covid-19 infections across Europe and parts of the US were the major catalysts for last month’s second half reversal in returns although, the inability of the US to process a further economic stimulus package ahead of the November 3rd election added to market frustration.
Earnings were generally positive news items especially for the big tech companies but did little to improve market sentiment in the second half of October. Central banks continued to provide positive rhetoric but as we have mentioned previously, volatility isn’t going away and returned in the final week responding to increasing Covid-19 infections.
Few Places to Find Cover
Over the duration of October’s 31 days, there were few assets that delivered positive returns.
Bond yields increased, pushing prices lower as investors worried about increased supply to fund stimulus packages.
Corporate bond spreads oscillated depending on the credit quality and commodities were either flat or lower in price.
Cash stood out as a beacon of stability. Currencies were relatively stable too.
In equity markets, the tech heavy NASDAQ fared best of the US and European indices by losing the least. North Asian equities bucked the trend and provided some modest positivity.
As national or regional lockdowns return to Europe, comparisons are being made to spring, earlier this year. However, a vaccine is much closer to being a reality and treatment is better for those that get Covid-19.
Central banks and governments together will do what it takes to support their economies. Yet, risk asset prices are significantly higher than mid-March. The thrivers among companies will continue to outshine those seeking merely to be survivors and sadly, many companies will fail without a subsidy.
Credit has probably had its rally (or at least most of it) but bond yields, most still sub-inflation, remain unattractive investments.
Parts of Asia appear to have dealt well with the pandemic to date and their economies look to have the brighter prospects at this juncture. However, as thematic investors, we focus on enduring themes that favour thriving companies within them. Those companies also have low debt and leverage and sustainable free cashflow. They remain our focus through the managers we choose to invest with.
An example of a key investment theme added to in October and referenced in our mid-monthly update, is sustainable energy. The transition to sustainable energy has a considerable tailwind from numerous governments and pressure groups behind it for years to come. Themes that have this kind of longevity are, in our view, the best place to invest for future returns.