INVESTMENT REVIEW – October 2020

The month of September saw greater volatility in equity markets on the resurgence of the coronavirus
Covid-19 and renewed political concerns, in spite of further positive economic developments and the
continued support of central banks. Such volatility seems likely to persist, although markets are as
hard to call as usual, and our focus remains on resilient assets with the potential for growth in a
world that has changed and is ever-changing.
The virus has been a challenge with a renewed incidence of cases that has taken the total worldwide
to some 33.9m, according to the data collected by Johns Hopkins University, and the number of
recorded deaths to over 1m. The decisions that governments or local authorities take on the scale of
renewed restrictions entail a conflict between the need to curtail the current pandemic and the costs
of further lock-downs to health, education and the broader economy. The uncertainty itself dampens
business investment and consumer demand, as will rising unemployment as support schemes reduce.
There are still hopes for an effective vaccine, although it will take some time to be widely available
and an increasing number of people stand against the idea of any injection.
There seems to be no shortage of tension in the world, within countries and between them, although
that has long been the way. In the US in particular the pending presidential election on 3rd November
has seen a deepening political divide even before the extra debate on the replacement for Ruth Bader
Ginsburg at the Supreme Court. While the polls have suggested a margin of victory for Joe Biden the
result is likely to be close, dependent upon the electoral college system and postal votes. On the fair
assumption that there is a clear result and that Donald Trump accepts defeat should he lose, much
will depend on the balance between the President and Congress - markets are concerned about higher
corporate taxes should the Democrats have control, but an uncertain outcome would be worse. In
Asia, China has been increasing the pressure on Taiwan and Suga Yoshide has become prime
minister of Japan, having served as chief cabinet secretary to Shinzo Abe, at a challenging time; he
offers continuity if a change in focus. There is uncertainty too over the eventual outcome of the UK’s
negotiations with the European Union, which seem likely to go down to the wire.
There has been encouraging economic news. Chinese industrial output rose 5.6% in August according
to the data and retail sales there turned positive after seven months of decline, if by a marginal 0.5%,
boosted by spending on cars and phones. Chinese exports rose 9.5% in August on the same month in
2019, after an increase of 7.2% in July and a minimal 0.5% in June; this was in part market share gains,
as South Korea saw a sixth consecutive month of decline. China had an estimated 17% of world
exports in the second quarter compared to 14% on average in 2019, while its trade surplus with the
US was $34.2bn, the highest level since November 2018. Global trade has staged a recovery, with the
largest monthly rise on record in June, for the latest data, and a forecast now of a 10% decline over
2020, compared to initial fears of a drop of 30%, in part as the lock-down has hit services more than
goods and in part as supply chains have improved. Research indicated that greenhouse gas emissions
were 17% lower in April than the prior year although they are now only down only some 5%, even as
China has set a target of being carbon-neutral by 2060.
Central banks have broadly committed to maintain their current policy of asset purchases and
minimal interest rates. The US Federal Reserve has said that it would keep rates at near zero until
inflation moderately exceeded its 2% target, elusive for now. Its Chairman Jerome Powell noted that
while there had been a marked improvement in the economy the outlook was highly uncertain. The
Fed now forecasts a -3.7% contraction in the economy in 2020 compared to its projection of -6.5% in
June and an unemployment rate at 7.6%, rather than its previous 9.6%. Stretched finances and
political complications have limited the scope of governments to add to their fiscal stimulus: in the US
the Democrats have rejected a $1.3trn relief plan and have proposed a revised version of their own,
reduced to some $2.4trn but unlikely to be agreed. The ECB kept interest rates at -0.5% and tweaked
its expectation for the year to an economic decline of -8%, with a 5% growth rate in 2021. In the UK
inflation dropped back to 0.2% in August, with the restaurant discounts in Eat Out to Help Out a
factor. NS&I has not helped savers by cutting its rate and there remains a search for yield, even before
the negative interest rates that are under consideration.
In the UK the FTSE 100 fell by 1.6% over September to end at a level of 5866, with the sector exposure
and uncertainty over negotiations with the EU still weighing on the index. Mid-sized companies in
the FTSE 250 index were down 2.7% and the FTSE SmallCap index 1.4%. The FTSE AIM All-Share
was off 0.5%. The FTSE All-Share return including income was -1.7% in the month.
In the US the S&P 500 index fell by 3.9% and the NASDAQ index by 5.2% - enthusiasm for the
technology sector did fade, in part on valuations: earlier in the month 530 of 8,513 listed companies or
6.2% traded on at least ten times sales (implying in simple terms a rich valuation of 50x earnings on a
margin of 20%), a figure only exceeded in the dotcom bubble in March 2000 when the proportion was
6.6%. The more concentrated Dow Jones Industrial index was down 2.3% and smaller companies, as
represented by the Russell 2000 index, were 3.5% lower.
In Europe the EURO STOXX 50 was down 2.4% in the month, with Germany most resilient of the
region’s major markets, while the Euromoney index of smaller companies managed a gain of 1.4%. In
Japan the Nikkei 225 index also rose if by just 0.2%.
The MSCI Emerging Markets index in US$ was down 1.8% in the period, with further weakness in
Latin America where the coronavirus has had an increasing impact and a fall in the Shanghai index of
5.2%; the Hang Seng index in Hong Kong was down 6.8%. The MSCI Frontier Markets index was
0.6% higher, with Vietnam up by 2.7%.
For bond markets the UK 10-year gilt yield fell back from a level of 0.31% to end the month at 0.21%
and the total return for the FTSE Gilts All Stocks index was 1.5% in September. In the US the 10-year
yield was a little lower at 0.68% as against 0.7% while in Europe the 10-year bund in Germany
reversed the previous month’s move at -0.52% from -0.4%. The month saw positive returns for higher
quality fixed interest if declines in high yield and emerging market debt indices.
Sterling fell by 3.3% over the month against the US$, as that currency rallied and concerns over Brexit
mounted, and it closed at a rate of $1.29:£. Against the euro Sterling was 1.6% weaker at €1.10:£.
The price of gold saw a further decline in the month and ended off 4.2% at $1886 per troy ounce. The
price of Brent oil fell back to close the month 7.7% lower at $41 per barrel – the International Energy
Agency now expects overall demand in 2020 to be 91.7m barrels a day, the lowest since 2013 and
down by 8.4m barrels on 2019. The main metal prices were mostly weaker, palladium aside, although
agricultural commodities were mostly higher, with coffee ajar. The Vix index as a gauge of expected
volatility in the US market was little changed in the month.
Julian Cooke – Director 1st October 2020
Vintage Asset Management
7a Wyndham Place, London W1H 1PN
Tel.: 020 7989 3110
Email: info@vintageassetmanagement.co.uk
www.vintageassetmanagement.co.uk
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.