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News and Views

The week to Wednesday’s close saw global stocks close 2.3% higher, led by global technology shares as they recovered from their fall from record highs.  The US stock market gained 3.9%, European shares 0.2 while the UK closed -0.1 lower. US technology led the way with a gain of 5.0%.

Wednesday also marked the end of the third quarter.  We came into this with the UK, Europe and US gradually opening up for business again, optimistic about returns for long-term investors as life returned to normal. While some may have expected the return to normal would be a smooth, rapid transition the reality was always going to be that there would be setbacks as well as advances and that recovery would stretch well into 2021.

The global stock market rally that started in late March petered out during the quarter as investors became more discerning, with less attractive countries and company shares gradually dropping off buy lists to leave global equity markets higher, but increasingly led by a narrow band of stocks benefiting from a strong pickup in sales due to Covid-19. Many of these companies are familiar to us and knowingly or unwittingly we use their services every day. The list includes Facebook, Apple, Google owner Alphabet, and Amazon – which you may think of as an online retailer but whose cloud-based Amazon Web Services business is so large it was likely involved in some way in creating the reporting pack in front of you.  

While the UK has many companies that have benefited from the change in how we live our lives they are generally smaller so have had little impact on the level of our stock market if they doubled.  In the US the opposite has been true: They are large and have a major impact.  Just to put that in context, on the day of September it was widely reported in the UK press that the stock market value of just one of those, Apple, had exceeded the value of the UK’s top 100 companies. 

As we move into the final quarter of the year we will get a better feel for the underlying problems that lockdown and gradual recovery has left, for example how many jobs have been lost and what the government will do about the huge debt it has incurred during the crisis. It is a problem faced by many governments but it is important to maintain the confidence of international investors in the pound. Our expectation is that government and the Bank of England will remain focused on ensuring growth, so interest rates will remain low and we will see further selective support for the hardest-hit industries.

This supportive environment has seen companies gradually resume dividend payments and a pickup in mergers and acquisition activity, both signs of a high level of confidence in the future.  With the exception of government debt, typically a defensive asset in time of trouble, returns in other assets were generally positive as they continued to recover from the February sell-off and as investors priced in the benign  interest rate outlook.

Looking into the next quarter we expect market volatility short-term, not only around Covid-19 but also as Brexit edges towards completion and as the US Presidential election clarifies the future direction of US policy. But the underlying trend of economic recovery will remain, providing a positive outlook for portfolio returns in 2021.

Higher taxation and reduced tax breaks must be on the agenda but with the headwind from Covid-19 expected to stretch well into 2021 it may well be next autumn before we see any changes. While the financial services industry is well known for warning that personal taxes will rise, things really are different this time.  There has probably never been a better time to make sure your financial affairs are in order and to make the best of the current personal taxation regime while it lasts.

If you would like to find out more about our financial planning service please ask your investment manager or contact us directly via our website.