September 2020 Review
The market volatility seen in August continued at a greater pace in September with a focus on the technology sector and the big US ‘tech’ firms. At one stage, Tesla, which had quadrupled in size since the end of March 2020 and was expected to enter the S&P 500, fell by over 30%. The NASDAQ fell by 10% in a week. The US S&P 500 equity index fell by 4% in September.
The early month volatility could be blamed on retail activity in the options market although Softbank stole the headlines for that occurrence and agreeing to the sale of ARM holdings, the UK chipmaker, to Nvidia. Whereas August ended up being positive for risk markets, September was predominantly negative for those markets’ returns, especially for those investors with a passive US equity focus.
Investors were also faced with political issues on both sides of the Atlantic with November’s US Presidential election and Brexit discussions coming to the fore. As September continued, rising Covid-19 infections, particularly in Europe, raised the level of nervousness within the investment community. Positive news on vaccine trials painted a better outcome in the not too distant future but after the substantial rally in the beneficiaries of the digital economy, many investors were expecting a pull-back in equity prices of those stocks. The occasional relief rally in sectors that had failed to meaningfully recover from March’s price falls petered out.
Against this backdrop, government bonds in developed markets, regarded as low-risk assets despite their low and negative real yields, performed well – prices benefiting from even lower yields. High yield bonds struggled though as expectations of defaults rose.
Asian countries have been more resilient to Covid-19 and their equity markets were similarly resilient, faring relatively well, not least Japan, where a change of Prime Minister from Abe to Suga proved to be something of a non-event as far as Japanese equities were concerned.
Thematically, basic materials, industrials, healthcare and consumer goods were the better performing sectors. Geographically, the US, Canada and Brazil were the deepest in negative territory.
October should see some resolution to Brexit talks although, while the rhetoric has become more positive from both sides, that isn’t a foregone conclusion. At the time of writing, President Trump has been admitted to a military hospital having tested positive for Covid-19 and is running a high temperature. At 74 and overweight, he can be deemed to be in the vulnerable category. At this stage, it is unclear what impact that event will have on the election timetable but already nervous financial markets will continue to be so.
October’s financial market returns may well be determined by the degree to which rising Covid-19 infections elicit local or regional lockdowns and the consequent economic impact. However, equity markets will also be looking into 2021 mindful of the likely emergence of a vaccine and economies opening up with the support of loose monetary policy. Further fiscal stimulus is on the cards in the US and elsewhere but, as in the UK, the cost of it and the burden on future generations will be weighed against keeping a lid on unemployment.
While equity valuations of companies exposed to the digital economy will oscillate, themes relating to cybersecurity, cloud computing, online shopping, automation and sustainability will, in our opinion, continue to benefit from significant cashflow generation.