22 September 2020
What the Fed left unsaid
The biggest driver on markets last week came in the form of a statement by the Federal Reserve – and, specially, what it didn’t say. Market observers had been expecting the US central bank to commit to boosting its large bond-buying programme, which wasn’t mentioned. However, the Fed did confirm it will hold interest rates at their very low levels until the end of 2023.
Global equities slid following the statement, and there were dips in the share prices of some major US technology companies, However, US stocks in the S&P 500 index were only slightly down for the week, due to earlier gains.
Although the statement “may disappoint those who were looking for more explicit guidance on how policy would respond to changing economic conditions”, the announcement contained “no real surprise”, says Keith Wade, Chief Economist & Strategist at Schroders, which manages several funds for St. James’s Place.
US election makes its presence felt on markets
Another major driver of market volatility is the upcoming US election. With the date of the vote drawing closer, investors are eyeing up the candidates’ tax, legislative, and economic policies and assessing the possible economic impact of either party winning the race.
Investors might be heartened to read that, taking the dotcom bubble and Global Financial Crisis out of the picture, there has been almost no difference in average stock market returns during the presidential terms of the Democrats and Republicans since 1933.
Last week, US Supreme Court judge Ruth Bader Ginsburg passed away, leaving a powerful legacy of trailblazing advocacy for gender equality and civil liberties, which made her a liberal icon during her 27 years on the bench. Indeed, the next person to take the position on the highest court in the US has big shoes to fill, and it looks like they must do so just six weeks before the election. The decision on who will replace her will no doubt generate controversy, with President Trump insisting the Republican Party should replace Justice Ginsburg – a move Democrats have strongly opposed.
Risk of no-deal rises
With the Internal Market Bill making it through the second reading in the Commons last week, former UK Prime Ministers, as well as politicians in the US, lined up last week to share their misgivings about this government legislation, which threatens to unravel post-Brexit trade talks. The proposed law would override the Withdrawal Agreement the UK signed with the EU earlier this year, and in doing so would break international law, in order to enable the UK to override customs arrangements in Northern Ireland. Some Conservative MPs abstained from voting in the second reading, while others may revolt later.
Having caused more tension between the two negotiating teams, the bill has increased the risk of a no-deal outcome. However, last week European Commission President Ursula von der Leyen said that she’s convinced a deal is still possible.
Given that time is running out to reach a deal, Brexit is returning as one of the main issues on the UK public’s mind. In fact, it may soon take first place above health and the economy, according to a recent poll (see In The Picture). The possibility of a no-deal Brexit has been weighing on UK equities and sterling.
Choppy waters ahead for UK?
Brexit aside, last week’s headlines show that there is plenty of economic recovery still to do, as the government’s handling of the pandemic comes under scrutiny.
As the week ended, scientific advisors were publicly debating the possibility of a second national lockdown perhaps to coincide with the upcoming half-term. Prime Minister Boris Johnson is set to address the nation at 8pm tonight, as the UK’s COVID-19 alert level moved to 4, meaning transmission is “high or rising exponentially”.
Meanwhile, official figures showed a sharp rise in unemployment in the three months to July – the sharpest quarterly increase since 2009. And, in a sign of the times, the Bank of England even said last week that it’s exploring how it could lower interest rates into negative territory next year, if the economy stalls.
For investors in UK companies, all these data point to clear risks. However, a balanced portfolio that blends locally focused companies with overseas earners, can help mitigate those risks. Fund managers have been preparing for choppy waters ahead by considering carefully how their investments will perform in the face of likely Brexit outcomes, and making changes if needed, says Chris Field of Majedie, which co-manages UK equity funds for St. James’s Place:
“Brexit is of little relevance to the long-term earnings potential of Unilever, AstraZeneca, Roche, Boston Scientific or 3i, for example. We believe investments in these companies will be rewarded from compounded growth, strong product pipelines and excellent returns on underlying assets. Moreover, one of the key lessons we have learned over many years of investing is that heightened uncertainty often goes hand in hand with extraordinary long-term opportunity.”
A financial adviser will help you plan your investment portfolio to protect yourself from volatility, and will provide the guidance, support and stability required to help you stay on course to reach your financial goals.
And lastly for the week’s news, Japan’s new Prime Minister Yoshihide Suga is proving popular on markets. Suga won the party vote on his eight-year record at the heart of the Abe administration – he’s no showman, but the party veteran is expected to continue the economic policies of his predecessor Shinzo Abe, suggests Yoshi Ito of Nippon Value Investors, manager of the St. James’s Place Japan fund:
“The new cabinet members also seem to indicate continuity from the previous administration. We think Mr Suga’s inauguration as prime minister is more likely to have a positive effect on the Japanese economy and the Japanese stock market in general.”