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MAIA Market Commentary Q430 October 2020

As has been the case throughout the whole of 2020; sentiment, volatility and exogenous factors to global markets have dominated the third quarter for investors. Economic data continued to show signs of a rebound, although as we moved through the quarter the positivity moderated.

The start of the quarter provided excellent returns for investors as lockdown measures were eased globally and a greater chance of a V shaped recovery was being priced in by investors. This lagged, as did the hopes of a V shaped recovery, as the summer months moved on. Rising case numbers, a longer timeframe for a vaccine and the ending of fiscal support measures loomed as we moved into Autumn. This led to greater volatility during September for all asset classes. Over the quarter, equities in Asia and the US provided the greatest returns, whereas Europe and the UK lagged.

Within fixed income, yields were mainly flat, but spreads tightened in line with the rise in equity markets at the start of the quarter. This led to a modest return for corporate bonds.

Commodities were broadly positive. As corporate activity increased and lockdown measures were eased, commodities were pricing in a return to pre lockdown conditions. Gold continued its positive run as investors worry about uncertainties in markets, as well as possible future inflation, and the risk of a falling US dollar.

Fiscal stimulus vs monetary policy has been a debate which investors have focused on for several years following the global financial crisis. The debate has arisen again over the past few months as countries continue to fight the COVID-19 pandemic. Many central banks have increased support exponentially and fiscal support packages by governments have also been larger than seen before, however, it does seem that more needs to be done.

Within Europe a €750 billion recovery fund was passed. This is the biggest stimulus package passed in the region and will allow Europe to move towards a more sustainable footing. This is due to some of the packages that have been included being earmarked for fighting climate change in the region. Many of the fiscal employment support packages within individual European countries have been extended to provide additional help.

In the US, a stalemate between the Democrats and Republicans has put an additional fiscal package on hold. Many market participants are waiting for this package to help replace the lost incomes and lack of revenue for businesses and citizens that are still being impacted by state lockdowns and a higher unemployment rate.

In the UK, the current furlough scheme enacted by Chancellor Sunak in the spring is finishing on the 31st October and so a new Job Support scheme is being launched in November. The new fiscal package is less generous for workers and businesses. Investors will focus on moving into the new year, and the effects the stimulus packages could have on the UK economy, businesses and the unemployment rate.

Central banks have continued to provide substantial monetary policy packages. Within the quarter, both the UK and European central banks have stated that further Quantitative Easing is being evaluated with nothing further being implemented yet. In the US, the Federal Reserve presented its new inflation targeting regime, which is a huge shift in monetary policy. The change will allow inflation to ‘run hot’ for a period of time to allow for their inflation target rate to be met. Having a higher inflation regime will lead to differing market conditions than investors have faced recently.

Trials for a COVID-19 vaccine are continuing, with a viable vaccine needed as soon as possible for the global economy to get back on track. AstraZeneca, Johnson & Johnson and Pfizer all moved their trials to phase three in the quarter. The Oxford vaccine trial run through Astazeneca did have to pause due to an adverse event but it recommenced quickly after a review. Pauses like this are not uncommon in clinical trials. Investors will continue to focus on the timeframes for a vaccine to become available and the path of immunisation that is taken.

The US election is heating up with only weeks to go until polling day. Both parties are ramping up their campaigns as they move into the home straight. Polls are now suggesting that Trump has gained some ground in three of the key swing states but has further to make up in four of the other swing states. These states are key to who will gain the Presidency. Focus will now move onto the television debates that have been scheduled for October and November and what final policies both parties will put forward if their candidate did win the Presidential race.

In the UK, Brexit has started to dominate headlines again as the deadline to get a deal signed off by the end of October looms. Volatility is slowly rising as the deadline day draws near and concessions are still to be agreed. Markets are still pricing in a limited trade deal with considerable transition arrangements to ease the burden of change.

With the economic backdrop as it currently stands, active management is still the core consideration of the investment team here at MAIA. The model portfolios have recovered well and should continue to do so over time as equity markets return to pre-COVID levels. However, with the Brexit deadline looming, the upcoming US election and a coronavirus vaccine still not available, we believe that short term volatility and uncertainty will persist.

We are still of the view that the disruption that COVID-19 has had on equity markets and the world in general have created opportunities which could provide excellent returns in the medium to long term for investors.

What to look out for next quarter: Focus on the US election

With under two weeks to go until polling day, the US election is heating up. Polls in key swing states continue to be tight, even with national polls currently showing a win for the Democratic nominee Joe Biden. As we move towards November the 3rd, greater focus is being placed on the election and what the different outcomes could result in for the US moving forward.

For the incumbent President to be successful at retaining his seat in the White House, further gains will be required in four of the swing states including Arizona, Michigan, Pennsylvania and Wisconsin compared to where the polls are currently at. These swing states hold the largest number of electors in the electoral college of 538. For either President Trump or Joe Biden to win an absolute majority, 270 votes are required.

One major talking point that has arisen over the past months regarding the election is the use of postal votes which have been applied more widely due to the COVID-19 pandemic. Many states are using postal balloting to allow voters in constituencies where lockdown measures are in place to cast their vote. The counting of these votes may cause both parties to dispute the recorded outcome. This is due to the time taken to count postal votes and the validity that could be questioned in the counting of these votes. President Trump has already signalled his thoughts on how utilising postal votes could lead to a rigged outcome.

These perspectives from the current President, the time taken for votes to be counted and the unprecedent action of a dispute of the result, could lead to the outcome of the election being delayed past the 3rd of November. This type of action provides markets with even greater uncertainty. The run up to an election is a volatile time and with these extra issues arising, pricing in what is already such a binary outcome is becoming even more difficult, especially in the short term.

For longer term investors such as ourselves, the short-term noise and volatility of this election does not derail our longer-term thoughts on the US and global economies. The result of the election currently has several possible outcomes, a Democratic clean sweep; a Democratic win with a Republican senate; or no change to the current regime.

Both candidates do have differing views on policies they would look to enact in office, but due to the current unknown result of the election, investing for these now is far too difficult to do. We do understand that taxation, healthcare, infrastructure, climate change and technology company regulation will be in the spotlight under each president. Any changes to these factors are dependent on not just who is elected as president, but whether the Senate and House of Representatives have a Republican or Democratic majority. Something which will not be known until after November the 3rd. As such, we are focussing on the fundamentals of the US economy and the external factors which we believe will not materially change with whoever is sworn in as the US President.

The shutdown of the global economy has provided a very short but sharp recession for the US economy. It may take several years for pre COVID-19 growth levels to be reached again. Further fiscal stimulus measures are required to help the US economy to continue to fight the pandemic. The Federal Reserve will continue to provide looser monetary policy, but this will have to be run alongside large fiscal spending packages passed by the US government.

Neither candidate will want to derail the opportunity to pull the US economy through this recession and so both will provide market friendly policies up front to facilitate this to happen. Moving through the upcoming election term, this may change with focus being placed on taxation of corporations, healthcare and technology regulation; but focus should rightly be moving the US economy out of recession when the President is sworn into power in January 2021. For this reason we are currently waiting to see what the election results will bring and then assess when any changes are needed to our asset allocation and fund selection at that point.

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