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Global equities made gains in the third quarter and the MSCI World index was up 3.15%. This recovery was underpinned by decisive action from governments and central banks to provide extensive fiscal and monetary support in a bid to cushion economies from the impact of restrictions to control the spread of COVID-19.

This global index masks the divergence in regional performance, however, with US and emerging markets equities having the strongest gains in Sterling terms, followed by Japan and Europe. The UK was the outlier, with the FTSE 100 making a loss of -4.02% over the quarter. It is fair to say that the UK market looks undervalued compared to other global markets, particularly the US. The main reason for the UK’s undervaluation and comparative underperformance to other global markets is the uncertainty surrounding whether the UK and the EU will strike a trade deal with the EU prior to the December deadline.

On the positive side, most of the companies within the FTSE 100 are global businesses, so their revenues are not exclusively tied to the performance of the UK economy. In a normal year, about 70% of the revenues generated by FTSE 100 companies come from overseas. So even if UK economy is adversely affected by the exit from the EU and/or it fails to recover quickly from the coronavirus crisis, the majority of the companies in the index have well diversified global revenues, which creates the potential for recovery.

One area where we see risk at present is the US equity market. The S&P 500 has gained 9.8% in the year to 7th October in Sterling terms. This performance has been driven by technology companies such as Facebook, Apple, Microsoft, Amazon and Google. All have benefitted from trends such as cloud computing, working from home and online shopping, which have become integral to both businesses and consumers to keep going during “lockdown” measures. However, valuations for these individual companies and the S&P 500 have become expensive both compared to historical averages and to other regions. There is no guarantee that these companies’ future growth forecasts will be realised and the US election poses a risk for them, with Joe Biden stating that he will look into stronger regulation of their offshore profits.  We will be keeping a close eye on developments, but it is important to keep in mind that our model portfolios are well diversified geographically and are not overly weighted in the US.

It is likely that the pattern and speed of economic recovery from “lockdown” measures to control the spread of COVID-19 will vary by region and country. Our strategy continues to be to keep our portfolios diversified by geographic region and asset class and to focus on larger “good quality” i.e. financially robust companies which have the potential to fare comparatively well in a variety of economic conditions.

This article is for information purposes only. It does not constitute investment advice and is not a recommendation to invest. The value of investments and the income from them may go down as well as up and you may not get back your original investment.  Past performance is not a guide to the future.

Date of publication: 12 October 2020

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