INVESTMENT REVIEW – September 2020

Over the month of August equity markets made the most of some more positive economic news and
the continued support of central banks, in spite of a resurgence in cases of the coronavirus Covid-19
and some political challenges.
While a fully V-shaped recovery remains unlikely in countries that were hit hard by the impact of the
virus, the US economy has looked reassuringly robust, with a pick-up in business activity including
manufacturing and with exports helped by the weaker US$. Employment growth slowed in July and
the unemployment rate remained at 10.1% but US consumers have been helped by an improving
property market. They quickly spent the stimulus payments received earlier in the year and they may
appreciate the expected further $1trn tranche that Congress is debating, although the political divide
appears to be deepening ahead of the presidential elections. The incumbent will benefit from better
economic growth and the higher stock market, and will emphasise law and order, although the race
may go down to gaffes, postal votes and the intricacy of electoral colleges. A safe vaccine to counter
the virus before the end of the year might seem unlikely too but a release would boost both markets
and forecasts for economic growth in 2021, on the basis of increased consumer spend (and even if few
would opt to have a Russian injection at present).
The virus has still been a challenge, given the incidence of cases in developing countries as well as the
resurgence in a range of others as restrictions were re-imposed. This has slowed the recovery in parts
of Europe, although the German IFO business survey showed improved activity in August, rising to a
level of 92.6, even as other surveys indicated a slowing in such improvements. Japan was another
country to report a sharp contraction in its economy, which fell by 7.8% in the second quarter, while
the prime minister Shinzo Abe stepped down before the end of his term, owing to ill health. He had
brought some longevity, serving since 2012 the longest consecutive spell in office since his great uncle
(Eisaku Sato in 1964-72). This has raised some doubts over his reform programme, depending on who
assumes the role, which had helped a degree of development in Japan, even without the bonus of the
postponed Olympics and if not yet managing to reach all targets: for example, the rate of core
inflation was zero in the latest data.
Low inflation has underpinned the current environment of low or negative interest rates, even as
some indicators point to price pressures that might make current debt levels less affordable over time.
The US Federal Reserve announced a revised and more flexible strategy, which would mean that it
would not increase interest rates pre-emptively if inflation were to risk running over the target of 2%.
This approach would suggest that rates could stay lower for longer, if not for ever, while the Fed also
introduced greater flexibility in how it would approach its other target of full employment. The
People’s Bank of China meanwhile injected 700bn yuan (approx. £80bn) into its economy through
one-year loans to financial institutions as a further stimulus, an increased level from the 550bn yuan
of loans that were expiring. However, by keeping the lending rate for corporate and household loans
unchanged for the fourth consecutive month, the authorities maintained a measured approach for an
economy that is forecast to achieve a rare positive level of growth in 2020. The challenges in China
seem more political than economic, given the state’s actions over Hong Kong, wider tensions in the
region and the persistent threat of renewed trade disputes.
For now little seems to dampen investor enthusiasm for the technology sector, as it benefits from the
accelerated trends the coronavirus crisis brought and offers growth potential too. The five largest
companies in Google’s parent Alphabet, Amazon, Apple, Facebook and Microsoft now represent over
a fifth of the S&P 500 index and accounted for a substantial portion of its rally from the low point in
March, so that as the US market reached new highs the average share was still off 7%. While
valuations look high in the sector they do not relative to low bond yields, while the companies are
generating cash and can pay higher dividends (and even tax): Microsoft was one of the top ten
dividend payers in the second quarter of 2020, alongside Nestlé, Rio Tinto and China Mobile. Overall
dividend payments were down by over a fifth and at $382bn were the lowest for a second quarter
since 2012, according to a study by Janus Henderson; the forecast for the year as a whole is now for
declines of 19-25% rather than the 35% drop initially expected. Canada has been resilient and US
companies reduced buy-backs by nearly half, but the UK and France have struggled.
In the UK the FTSE 100 saw a modest gain of 1.1% over August to end at a level of 5964, with the
sector exposure and uncertainty over negotiations with the EU a factor in the index failing to hold
above 6,000. Mid-sized companies in the FTSE 250 index did better with a rise of 5.1% and the FTSE
SmallCap index gained 3.4%. The FTSE AIM All-Share was 8.9% higher. The FTSE All-Share return
including income was 2.4% in the month.
In the US the S&P 500 rose by an additional 7%, helped again by the strength in technology shares
which saw the NASDAQ index gain 9.6% so as now to be up almost a third for the year to date. The
more concentrated Dow Jones Industrial index rose 7.6% and smaller companies, as represented by
the Russell 2000 index, were 5.5% higher. The weakness in the US$ again reduced returns to investors
in Sterling somewhat.
In Europe the EURO STOXX 50 was up 3.1% in the month, with Germany doing best of the region’s
major markets, while the Euromoney index of smaller companies gained 4.6%, leaving it now flat for
the year to date. In Japan the Nikkei 225 index rose 6.6%.
The MSCI Emerging Markets index in US$ rose 2.1% in the period, with Asian markets offsetting
some weakness in Latin America. The Hang Seng index in Hong Kong was up 2.4% while the MSCI
Frontier Markets index was 7.9% higher, with Vietnam up over 10%.
In the bond markets the UK 10-year gilt yield increased sharply if from a low level of 0.1% to end the
month at 0.31% and the total return for the FTSE Gilts All Stocks index was -3.1% in August. In the
US the 10-year yield also rose, moving from 0.53% to 0.7%, as in Europe, with the 10-year bund in
Germany down at -0.4% from -0.52%. The month saw negative returns across almost all fixed interest
Sterling was up a further 2.2% over the month against the US$, as that currency continued to weaken,
and it closed at a rate of $1.34:£. Against the euro Sterling was 0.8% higher at €1.12:£. The price of
gold saw a rare decline in the month and ended off 0.4% at $1968 per troy ounce, as riskier assets
found favour. The price of Brent oil was again higher and closed up 4% over the month at $44 per
barrel, up a fifth over three months if still down nearly a third in 2020 to date. The main metal prices
were all higher, as were agricultural commodities. The Vix index as a gauge of expected volatility in
the US market rose in the month.
Julian Cooke – Director 1st September 2020
Vintage Asset Management
7a Wyndham Place, London W1H 1PN
Tel.: 020 7989 3110
Vintage Asset Management Limited is authorised and regulated by the Financial Conduct Authority,
No. 489408.
IMPORTANT NOTICE: Any forecasts, figures, opinions or investment techniques and strategies set
out, unless otherwise stated, are Vintage Asset Management’s own. They are considered to be
accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any
error or omission is accepted. They may be subject to change without reference or notification to you.
The views contained herein are not to be taken as an advice or recommendation to buy or sell any
investment and the material should not be relied upon as containing sufficient information to support
an investment decision. It should be noted that the value of investments and the income from them
may fluctuate and investors may not get back the full amount invested.