October 2020
Today, COVID-19 is no longer the unknown but the new normal and is spreading again in the U.S. and Europe. The combination of caution and restrictions on travel and hospitality continue to impede the recovery. The reopening of economies that began in May will contribute to GDP recovery, but a second wave of virus infections have been followed by localized restrictions on activity. Concern about the resurgence of the virus may well restrain demand and activity as businesses are unlikely to invest in capital spending without greater certainty and/or tax incentives. Consumers will be cautious until personal safety and employment certainty are evident, so stimulus may be muted. As a result, post-pandemic deflation is likely.
China is already achieving levels of economic activity that exceed the pre-COVID period in many sectors. This is led by exports at +9.9% y/y growth in dollar terms in September, fueled by some catch-up after first half disruptions. Industrial production was +5.6% y/y growth in August, and retail sales edged into positive territory.1 In the UK, Brexit concerns are once again returning as the negotiations between the EU and the UK remain deadlocked. The UK saw one of the largest declines in GDP in Q2 (-19.8%) compared to its peers.2 Eurozone activity rebounded sharply as economies reopened in May and June. Second waves of the virus, especially severe in France and Spain, are hurting sentiment and highlight downside risks to recovery.
The November 3rd U.S. election hangs in the balance, with the threat of a contested election looming. Coronavirus is the most significant risk, but political uncertainty is also elevated. Lawmakers have failed to agree on another stimulus package, despite Fed Chair Powell’s repeated calls for additional fiscal help. Polls show a growing lead for Biden but potential delays in determining results and questions around a smooth transition of power could see uncertainty persist beyond November 3rd. Last month, we noted the Federal Reserve would no longer pre-emptively increase rates to cool higher inflation, and this monetary policy philosophy could trickle into other regions. This appears to have happened following the ECB’s announcement that it may consider allowing inflation to run higher for longer than usual. US dollar depreciation has been a significant trend in markets over the last few months. Historically, changes in USD have had a countercyclical relationship to global growth. There are several other longer-term factors that continue to support the recent decline. Yield compression and equity outperformance weakened the relative attractiveness of USD assets and reduced the cost of hedging for foreign holdings of USD assets. In Canada, extension of government support for households was enough for the minority Liberals to avoid a fall election. The Bank of Canada is expected to remain dovish, keeping rates at 0.25% and continuing the asset purchase program until the recovery is well underway.
Despite a slump in September, U.S. equities managed to gain over the quarter. The S&P 500 gained 8.9%, while the S&P MidCap 400 and the S&P SmallCap 600 gained 4.8% and 3.2%, respectively. Despite September’s retrenchment, Canadian equities gained in Q3, with the S&P/TSX Composite up 4.7%. Following an up and down month driven by an increase in regional COVID-19 cases, European equities declined 1.5% in September and finished Q3 down 0.03%. Continued struggles from large British banks also weighed on the S&P United Kingdom, which declined 1.7% in September and 4.8% for Q3. Asian equities ended Q3 up, with the S&P Pan Asia BMI gaining 8.9%. Most single-country indices posted quarterly gains, with Korea in the lead, up 11.5%. Gold was one of several major assets that started the quarter strong, reversed in September, but closed the quarter higher. Gold’s 3.6% September pullback was likely tactical in nature. Liquidity demands often result in Gold ETF selling as they are a highly liquid option to raise cash. Gold rallied sharply (22%) between April and July, reaching an all-time high in early August, mirrored by a stronger US dollar that finished the quarter nearly 4% lower.
In October, we maintained the asset allocations established in September. We continue to be positioned in shorter duration fixed income due to larger-than-average duration supply from the Fed. Lower rates mean lower income as inflation is positively correlated to yields. With interest rates low or negative, we maintained exposure to gold. Equity exposure to large cap reflects our view that shifting business models during this pandemic have had a negative impact on bottom lines but that select businesses are benefiting from the shift. We are continuing to monitor the recovery in Europe following the Eurozone’s agreement on a stimulus package.
Until a vaccine is available, economies continue to search for the new normal. There are numerous potential catalysts for market volatility in Q4, including a contested U.S. election result, a delayed stimulus bill, a no-Brexit scenario resulting in disrupted trade in the region, and rising global virus cases. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.
Deborah Frame , President and CIO
1 Trading Economics. China Exports. October 13, 2020.
2 Trading Economics. UK GDP. September 30, 2020.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. September 30, 2020. Index performance is based on total returns and expressed in the local currency of the index.
