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Global equities declined in October with the MSCI World index losing -3.08%.  The US presidential election, Brexit uncertainties and rising Covid-19 cases in many countries, notably across Europe and the UK, were the main drivers of negativity. However, equity markets reacted very positively to the breakthrough COVID19 vaccine announced this week by Pfizer, and the MSCI World index is up by 1.97% between 6th and 11th November. 

Sectors such as airlines and leisure finally saw a turnaround in their prices. Markets are likely to remain sensitive to further vaccine announcements and we may see short-term volatility. However, the vaccine news does raise the hope that the “social distancing” recession will be relatively short-lived and that economic and social life will resume at some point in 2021. Pfizer’s COVID-19 vaccine has been 90% effective during its trial, with no serious safety concerns. If they can secure emergency use authorisation, they hope to roll out up to 50 million doses this year and up to 1.3 billion doses in 2021.

The large-scale developed world government spending and low interest rates pursued by Central Banks make us wary about the long term outlook for government bond yields. Accordingly, we continue to focus on funds which invest in debt issued by companies within our portfolios. We recently made fund switches within our model portfolios to ensure they continue to be centred upon mainstream bonds with good credit quality and liquidity. 

The confirmation that Joe Biden will be the next President calmed US equity markets and the Democratic Party’s failure to secure as many seats as hoped in the Senate reduced concerns about large technology companies facing significant reform and regulatory pressure. We still consider “big tech”  and US equities to be overvalued, however, and are in the process of rebalancing all holdings in our model portfolios to keep your asset allocation in line, particularly in US equity. Regular rebalancing is an important component of investment management to keep portfolio’s long term risk and return profiles on track. Because funds achieve differing levels of short and medium term performance, the initial asset allocation drifts over time. The rebalance takes any profits and locks in capital gains on the assets that have outperformed and ensures that portfolios are realigned with the agreed risk profile.

The IMF expects China to show economic growth of around 1.9% this year, having contained the COVID-19 outbreak. Under a Biden presidency trade relations with the US are likely to be less contentious. This is positive news for the Asia Pacific region.  We are keeping an eye on political disruption in Hong Kong and China’s announcement of increased regulation of internet companies.

Over the long term the renewed lockdown measures in the UK are likely to have only limited economic impact. Businesses and individuals continue to have access to government support and companies have proved adaptable and developed “COVID-secure” ways of operating. Sectors such as construction have been allowed to continue to operate this time around. The dividend cuts and cancellations faced by UK equity income inventors could be reversed in some cases in 2021, although the terms on which the UK will trade with the EU still remain unknown and could have an impact. Stock selection will be key, with questions remaining which companies will restore dividends to previous levels and which are affected by “economic scarring”. “Bricks-and-mortar” retailers are one example because the pandemic has accelerated the pre-existing trend towards online shopping. We continue to keep a close eye on our UK Equity Income fund allocations and continue to hold two funds with sufficient differentiation by industry sector and investment approach .

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: 13 November 2020

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