Week ending 23rd October 2020.

World Markets at a Glance

As you can see from the accompanying table, most of the major global equities markets ended the week slightly lower.  However, this hides the week’s headline-driven volatility:  equity markets fell at the start of the week given the pessimistic headlines over rising coronavirus infections and a warning by US intelligence that Iran and Russia were attempting to interfere with the Presidential election. Thankfully much of those losses were erased towards the end of the week thanks to the prospect of additional stimulus measures and strong company profit announcements.

As we have previously said, we believe it is best not to get sucked into the news headlines (which we accept may be easier said than done given how deafening they currently are) and instead maintain a long-term perspective, as we believe there is plenty of upside potential for global equity markets.

For example, while the fandango with US fiscal stimulus and Brexit negotiations may be keeping the financial markets on tenterhooks given the constant mixed messages and can-kicking deadline extensions, we know that whoever wins the US Presidency will get a new US fiscal stimulus package passed, while with Brexit, talks have resumed – and it is in the interests of both sides to come to a trade agreement, even if it is fudged, given the challenges ahead for both the UK and European economies thanks to the coronavirus outbreak.

Additionally, this week’s economic data shows the recovery remains intact.  The Fed’s Beige Book showed the US economy continued to grow across the country as it recovered from the coronavirus outbreak, with housing and consumer spending areas of particular strength.  The US employment market also continues to improve, with yesterday’s (Thursday 22 October 2020) initial claims falling to a coronavirus low of 787,000 from 898,000 the previous week, while continuing claims (which reflect the total number of Americans claiming unemployment benefits) fell to 8.37m from 10m last week.

In the UK, retail sales grew 1.5% in September and although PMI data (Purchasing Managers’ Index) slowed from 56.5 in September to 52.9 in October, a reading above 50 shows the UK economy is still expanding – although the lower reading does unfortunately confirm our view that the ‘V-shaped’ rebound is starting to moderate to a ‘Nike Swoosh’ shape.

However, giving us the most confidence is the strong start we are seeing in this quarter’s reporting of company profitability (earnings) and accompanying statements.  In fact, so far of the 135 S&P 500 index constituents that have reported, 114 have reported earnings above estimates and in aggregate, companies have reported earnings a whopping 17.98% above expectations!  Additionally, despite the uncertainties surrounding the US Presidential election; fiscal stimulus talks; and the coronavirus, companies are talking optimistically about the future – this is very impressive and underpins equity market valuations.

It is a similar picture in the UK & Europe:  Barclays’ Q3 profits exceeded estimates; while both the Italian luxury clothing brand, Moncler and the French cosmetics manufacturer, L’Oreal, both said Q3 sales were better than their initial expectations; and the car and tyre manufacturers, Daimler and Michelin both increased their 2020 profit forecasts after a strong Q3.

This coming week we have US durable goods orders; US & Japanese jobless data; Japanese industrial production; Eurozone CPI inflation; and both the ECB and BoJ have monetary policy meetings.

Additionally, we will be looking with interest at the Q3 GDP reports from South Korea, Taiwan and Hong Kong as these will also provide us with clues on the strength of the global recovery; and China’s 4 day Communist Party meeting – which starts on Monday 26 October 2020.

Investment Management Team